Bank of Korea Eases Restrictions on Foreign Currency Loans
Foreign Currency Loans Now Available for Domestic Facility Funds
From the 28th, foreign exchange banks will be allowed to provide foreign currency loans to export companies for domestic facility funds.
On the 26th, the Bank of Korea announced that, as part of measures to improve foreign exchange supply and demand, it will permit foreign exchange banks to offer foreign currency loans to export companies for domestic facility funds. To this end, the "Foreign Exchange Transaction Business Handling Rules" were amended on the 24th of last month.
Export companies refer to those engaged in exports under Article 2 of the Enforcement Decree of the Foreign Trade Act, excluding individual business owners and small merchants. Loans will be granted up to the limit of export performance in the past year or the export performance expected in the current year.
The Bank of Korea, together with the government, announced the "Foreign Exchange Supply and Demand Improvement Measures" at the end of last year to ease related regulations in a way that helps stabilize the real economy and the foreign currency funds market for balanced foreign exchange supply and demand. This plan included the relaxation of foreign currency loan regulations.
Since July 2010, the Bank of Korea has, in principle, allowed foreign currency loans by foreign exchange business handling institutions to residents only for overseas actual demand to suppress unnecessary foreign currency demand and excessive foreign currency borrowing. As an exception, loans were permitted only for the purpose of domestic facility funds use by small and medium-sized manufacturing companies, limited to the existing loan balance of each foreign exchange business handling institution.
As of the end of December last year, the outstanding foreign currency loan balance was $29.96 billion, a decrease of $15.88 billion compared to $45.84 billion at the end of June 2010.
The Bank of Korea expects that this relaxation of restrictions on the use of foreign currency loans will help enhance autonomy for the private sector, including companies and banks, and alleviate imbalances in foreign exchange supply and demand. Companies will be able to make optimal choices considering the procurement costs between won and foreign currency loans, and banks are expected to benefit from diversifying their sources of income. A Bank of Korea official said, "In the process of companies selling the borrowed foreign currency in the foreign exchange market or supplying it to the foreign currency funds market for domestic use, it will also contribute to suppressing downward pressure on the won and improving foreign currency liquidity conditions."
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