[Great Transformation to Productive Finance]⑤"Banks Must Shift from Easy Real Estate Loans to Investment-Driven Operations"

Expert Recommendations for the Success of Productive Finance
"Strengthen In-House Credit Evaluation Capabilities to Expand Corporate Lending"
"Shift from Real Estate-Driven Growth to Investment-Centered Structure"
"Bold Policy Support Neede

Editor's NotePublic dissatisfaction is growing due to the sharp rise in real estate prices. While incomes remain stagnant, housing prices are soaring, significantly undermining residential stability. The root cause of this instability in the real estate market is attributed to excessive real estate financing by financial institutions. Critics point out that financial companies are not supplying funds to productive sectors such as businesses or high-tech industries, but are instead focusing on non-productive areas like real estate-backed loans, thereby injecting excessive credit into the market and fueling the rise in real estate prices. The Lee Jaemyung administration has set the 'Great Transition to Productive Finance' as a core economic policy goal based on this awareness of the problem. Overseas, following the 2008 global financial crisis, financial companies have reflected on their practices and are promoting a shift toward productive finance. In Korea as well, there is a growing call for policy support from the government and political circles, as well as a change in mindset among financial companies, for productive finance to take root.

"We take the public criticism of banks' easy lending practices focused on collateral very seriously."

Jin Okdong, Chairman of Shinhan Financial Group, attended the 'National Growth Fund National Reporting Conference' presided over directly by President Lee Jaemyung on the 10th of last month, and announced that the bank would break away from real estate-centered business practices. The National Growth Fund, which will be created with a scale of 150 trillion won, is a core policy of the Lee administration's productive finance initiative, with large-scale investments from both the private sector and the government in high-tech industries such as artificial intelligence (AI), semiconductors, biotechnology, robotics, and defense.

The chairman of the financial holding company tasked with the largest role in the 150 trillion won fund has pledged to move away from a business model centered on real estate-backed loans, and instead contribute to the national economy by supporting growth industries and corporate loans. Chairman Jin stated, "The reason for easy lending focused on (real estate) collateral is, in fact, a lack of foresight," adding, "To develop this foresight, we must pioneer accurate credit evaluation methods and enhance our ability to analyze industries. I promise before the President to devote ourselves to this area."

Park Hyunju, Chairman of Mirae Asset Group, also said before President Lee on the same day, "Korean financial institutions have become accustomed to making money from real estate loans," and added, "This is something that needs to change. I have reflected on this a lot myself." Chairman Park emphasized, "Last year, Korea's venture investment volume was about 11 trillion won, while deposits reached 2,300 trillion won," arguing that the focus should shift from growth based on real estate loans to investment-centered growth.

Enhancing Evaluation Capabilities Is Essential for Expanding Corporate Investment

Experts unanimously agree that for productive finance, the Lee Jaemyung administration's key economic policy, to succeed, financial companies such as banks, securities firms, and insurers must increase direct investment in growth industries and businesses. They stress that in order to expand investment in companies, it is crucial to strengthen the ability to assess the business feasibility and repayment potential of the companies receiving financial support.

As the financial sector's screening capabilities improve, it becomes possible to conduct sophisticated evaluations of innovative and venture companies. This, in turn, enables timely funding, establishing a virtuous cycle that boosts overall economic productivity and revitalization.

Technology finance is cited as a representative example of productive finance. Technology finance refers to a system that supports funding based on the value of a company's proprietary technology, rather than its financial status or real estate collateral. It was first introduced in 2014 to support innovative small and venture companies lacking financial resources. The outstanding balance of technology finance, which stood at around 60 trillion won in 2015, increased to 307 trillion won in the first half of this year.

The reason technology finance is considered successful-unlike venture finance, which failed in the early 2000s-is that company evaluations are now conducted systematically. Seo Junghak, CEO of IBK Investment & Securities, shared his experience at a seminar on expanding productive finance held in Yeouido, Seoul, on the 15th of this month. He recalled, "During the Kim Daejung administration, large-scale financial support was provided to venture companies with excellent technology, but many defaults occurred. There were also significant losses, and employees worked hard to resolve these bad debts."

He added, "Unlike venture finance, technology finance established a kind of safety net through technology evaluation, and began providing loans or investments only to companies with high technology credit ratings, which made its success possible. For productive finance to succeed, it is also necessary to establish business feasibility evaluation capabilities and a post-management system as a safety net." He continued, "It must be possible to evaluate whether companies benefiting from investment have the ability to repay, and a review system staffed with professionals capable of thoroughly assessing the relevant industry is needed."

In fact, the government is working to strengthen technology finance as one pillar of productive finance. To this end, it is improving systems to refine company evaluation methods and ensure that loans are concentrated on more promising companies, thereby promoting qualitative growth in technology finance.

Institutional support from the government is also essential for the solid establishment of productive finance. Japan is cited as a country actively promoting productive finance. Since 2003, the Japanese government has continuously implemented policies to expand relationship banking as part of productive finance, aiming to revitalize regional finance. Relationship banking refers to a practice where financial companies, when dealing with businesses, make lending decisions based not only on quantitative information such as credit ratings and financial ratios, but also on information obtained through ongoing business relationships, interactions, observations, and on-site visits. Although relationship banking generally involves higher costs, Japan has adopted a system in which the government and chambers of commerce support regional banks to relieve their financial burden.

Lim Sugang, Vice President of the Society for Productive and Inclusive Finance, explained, "Unlike Korea, which has only two regional banks, Japan has as many as 62 regional banks that drive its financial market. Therefore, revitalizing regional finance is essential for economic growth. If the government supports relationship banking by regional banks, banks can reduce costs and invest the remaining resources elsewhere."

Deregulation Needed... Virtuous Cycle Structure Must Be Established

For the practical implementation of productive finance, it is also important to create a virtuous cycle in which banks reduce costs and risks while venture companies resolve funding shortages.

Experts particularly emphasize that, in addition to tightening household loans, the government should boldly lower the risk-weighted assets (RWA) for bank venture investments. Banks apply risk weights to each type of loan asset to calculate RWA. The higher the risk weight, the greater the capital requirement. Banks must maintain a certain ratio of capital to risk-weighted assets under the Basel (BIS) capital adequacy regulations. Therefore, lowering these risk weights would provide more incentive for banks to invest in high-tech and venture companies.

Since the global financial crisis, domestic banks have expanded their operations with a focus on relatively safe real estate loans. According to the Financial Supervisory Service, as of the end of last year, the proportion of real estate-related loans among banks' won-denominated loans stood at 69.6%, a rising trend since the end of 2019. The total amount of real estate-related loans in the banking sector is 1,673.8 trillion won, with household real estate-backed loans (771.3 trillion won) accounting for nearly half (46.1%). Over the past five years, the increase has been centered on mortgage loans.

Banks have achieved record-high performance every year with this business structure. As a result, it is not easy for bank funds to flow into venture companies. For banks, which are already performing well, there is little incentive to take on additional costs and delinquency risks.

Seo Jiyong, Professor of Business Administration at Sangmyung University, stated, "There is criticism that the 400% risk weight for venture investment is high compared to advanced countries. If this were lowered to around 120%, the required capital would be reduced. If the government continues to curb mortgage loan demand while lowering risk weights, banks would have more incentive to invest in companies to maintain their profits."

Enhancing banks' own capabilities is also a major challenge. A senior official at the financial supervisory authority said, "During the venture boom in the early 2000s, a lot of investment was made, but many companies failed, resulting in significant losses. Ultimately, the key task for banks will be to strengthen their ability to determine which companies are worth investing in."