Bank of Korea, Financial Intermediation Support Loans Instead of Interest Rate Cuts (Update)

On the 27th, a Monetary Policy Committee meeting was held at the Bank of Korea headquarters on Sejong-daero, Jung-gu, Seoul, chaired by Lee Ju-yeol, Governor of the Bank of Korea. The Bank of Korea decided to keep the base interest rate unchanged at 1.25% during the meeting. / Photo by Moon Honam (Photo provided by the Bank of Korea)

[Asia Economy Reporters Eunbyeol Kim, Sehee Jang] Although the Bank of Korea kept the base interest rate unchanged, it has devised a plan to supply low-interest funds to companies affected by the novel coronavirus infection (COVID-19). This plan involves utilizing the Financial Intermediation Support Loan (FISL), which falls under the Bank of Korea's credit policy within its monetary and credit policies.

Unlike broad interest rate cuts that supply funds widely to the market, this approach has the advantage of targeting specific companies that have been affected for support. The FISL is a system where the Bank of Korea lends funds to commercial banks at an interest rate of 0.5?0.75% to promote loans to small and medium-sized enterprises (SMEs). This time, a support interest rate of 0.75% will be applied. By lowering banks' funding costs, the Bank of Korea supports the flow of funds to SMEs with weak credit ratings or limited financing capabilities.

On the 27th, at the Monetary Policy Committee meeting, the Bank of Korea resolved to expand financial support for companies affected by COVID-19 from 25 trillion won to 30 trillion won.

Additionally, it plans to provide 5 trillion won (equivalent to 10 trillion won in bank loans) to SMEs operating in service sectors such as tourism, dining, and distribution, as well as to small manufacturing companies facing export difficulties to China due to raw material procurement issues.

Furthermore, by utilizing the surplus from the unused quota in the Financial Intermediation Support Loan program, the Bank of Korea will effectively increase support by 1 trillion won (approximately 2 trillion won in bank loans) for startup companies and job-creating companies that can contribute to growth engines and employment expansion.

The Bank of Korea expects that this measure will contribute to improving the financial conditions of self-employed individuals and SMEs struggling due to COVID-19 by expanding the availability of funds and reducing interest burdens.