Does bank support for small businesses conflict with Value-up strategy?

New $1.3 bil. financial support scheme announced for small businesses

By Lee Yeon-woo

The banking industry announced new measures, Monday, to provide financially support to small business owners starting next year, with an estimated 2 trillion won ($1.3 billion) allocated over three years.

While some view the support as a reasonable move to assist struggling small business owners, critics argue that the government is intervening too frequently in the banking sector, attempting to address the country's sluggish economic growth.

This marks the second time the banking industry has made significant financial contributions, in response to both direct and indirect government requests to take on greater social responsibility. The current administration has repeatedly criticized the industry's record-high profits, accusing it of benefiting from increased loan interest rates, which translate into a heavier financial burden on borrowers.

Last December, the banking sector collectively committed at least 2 trillion won to initiatives aimed at supporting vulnerable groups.

"This support plan was created to help address the persistent challenges faced by small business owners and self-employed individuals," Lee Tae-hoon, an executive at the Korea Federation of Banks, said during a briefing announcing the new scheme.

Beginning next year, 20 domestic banks will reduce annual interest payments by 700 billion won on loans totaling 14 trillion won, benefiting around 250,000 small business owners. Over the next three years, the total amount of support is projected to total 2 trillion won.

However, this estimate is based on the assumption that 20 to 30 percent of small business owners will apply for each program. If the participation rate exceeds these projections, the financial burden on banks will increase accordingly, as more businesses would be seeking support than initially anticipated.

"Last year's measures had little impact on the net interest margin (NIM), as cashback support was recognized as other operating expenses," Hana Securities analyst Choi Jung-wook said. "However, this time, the new measures could potentially affect the NIM, though further details need to be reviewed."

Although banks continue to report record-high profits due to elevated interest rates, repeatedly pushing for social contributions based solely on their profitability could undermine management autonomy and damage investor confidence, according to Kim Sang-bong, economics professor at Hansung University.

Critics also argue that this scheme contradicts the Corporate Value-up Program, which focuses on enhancing corporate value by distributing profits to shareholders. This concern is especially pressing given the recent downturn in banking stocks, which have struggled in the aftermath of the martial law declaration. Foreign investors, wary of perceived policy risks, have been withdrawing capital.

In response to these criticisms, Financial Services Commission Chairman Kim Byoung-hwan defended the initiative, emphasizing that the measure could benefit banks in the long term. He also clarified that there are no plans to make the banking industry's contributions mandatory.

"In the short term, this may feel burdensome for the banking sector. However, if repayments are made diligently and the risk of defaults or delinquencies decreases, it could mitigate debt risks for banks, small business owners, and the economy as a whole," Kim said.

Rena Kwok, a credit analyst at Bloomberg Intelligence, echoed that sentiment. She noted that the measures "could partly alleviate asset quality pressures caused by weaker borrowers, who have contributed to asset quality erosion in recent years."

"While interest margins may narrow, lower credit costs resulting from successful restructuring could partially offset the impact," Kwok added.