[Asia Economy Reporter Kim Eunbyeol] The government is supporting companies to smoothly obtain loans in response to the novel coronavirus disease (COVID-19) crisis, but there is a claim that caution is needed as funds continue to flow to low-productivity companies.
On the 29th, the Bank of Korea stated in the 'Monthly Statistical Bulletin - Review of Corporate Financial Constraints after the Global Financial Crisis' that "Korean manufacturing companies experienced financial constraints mainly among small and medium-sized enterprises during 2009-2011, right after the financial crisis, and in 2017," adding, "During 2009-2011, low-productivity companies were significantly affected by financial constraints, but in 2017, financial constraints were found to be insignificant."
Financial constraints refer to a state in which economic agents such as the government, companies, and households face restrictions in securing funds or liquidity necessary for economic activities due to debt, credit rating deterioration, regulations, and so forth.
Right after the financial crisis, financial institutions such as banks reduced lending, making it difficult for low-productivity companies to obtain loans easily; however, in 2017, financial constraints appeared to be more prevalent among high-productivity companies.
Lee Hyun-chang, head of the Micro Institutions Research Division at the Bank of Korea's Economic Research Institute, explained, "As corporate credit risk has recently increased and the proportion of collateral and guaranteed loans has risen, financial cost burdens have decreased, possibly causing low-productivity companies to be relatively less affected by financial constraints." Typically, when financial institutions adopt conservative lending, low-productivity companies find it harder to secure funds and are naturally phased out, but recently this has not been the case.
Lee advised, "Rather than simply easing financial constraints through corporate sector credit policies, efforts should be made to minimize the negative impacts of financial constraints such as investment contraction and to improve resource allocation efficiency by strengthening the credit screening functions of financial institutions."
For this study, the Bank of Korea analyzed 9,522 Korean manufacturing companies subject to external audits as of the end of 2018 during the period from 2008 to 2018. Using financial information of these audited companies, variables such as corporate investment, internal funds, company size and age, profitability, and productivity were calculated.
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