[Great Transition to Productive Finance]⑥Im Sugang: "For Financial Reform to Succeed Where Moon Administration Failed, Real Estate Lending Must Be Further Tightened"

Interview with Im Sugang, Vice Chairman of the Production and Inclusive Finance Research Association (PhD in Economics)
"Mortgage loan risk weight should be boldly raised from the current 15% to 25%"
"Reduce real estate concentration and boost corpo

Editor's NotePublic dissatisfaction is mounting due to the sharp rise in real estate prices. While incomes have stagnated, housing prices have soared, significantly undermining residential stability. The root cause of this instability in the real estate market has been identified as the 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 flooding the market with excessive credit and fueling real estate price hikes. The Lee Jaemyung administration has made the 'Great Transformation to Productive Finance' a core goal of its economic policy based on this awareness of the issue. Overseas, following the 2008 global financial crisis, financial institutions have reflected on their practices and are pushing for a shift toward productive finance. In Korea as well, there is a growing call for government and political support, as well as a change in the mindset of financial companies, to firmly establish productive finance.

Soo Kang Lim, Vice Chairman of the Production and Inclusive Finance Research Association, is being interviewed on the 17th at Asia Media Tower in Jung-gu, Seoul. Photo by Jin-Hyung Kang

Lim Sugang, Vice Chairman of the Production and Inclusive Finance Research Association, emphasized, "For the Lee Jaemyung administration's productive finance policy to succeed, banks must drastically reduce their real estate-backed lending far more than they do now."

Lim, who served as an invited research fellow at the Gyeonggi Research Institute in 2020, designed the 'Basic Finance' policy, which was a signature economic initiative during President Lee Jaemyung's tenure as Governor of Gyeonggi Province. He is currently researching core financial policies of the current administration, such as productive finance and inclusive finance, at the Production and Inclusive Finance Research Association.

In an interview at The Asia Business Daily headquarters in Jung-gu, Seoul, on the 17th, Lim pointed to excessive real estate-backed lending by banks as the main reason why productive finance initiatives during the Moon Jaein administration ended up fizzling out. He stated, "Without reducing non-productive finance such as real estate lending, it is impossible to expand productive finance," and added, "The Moon Jaein administration failed to properly reduce non-productive finance."

Lim argued that for the Lee Jaemyung administration to achieve policy effectiveness, it must further tighten banks' mortgage lending to reduce non-productive finance. As a representative measure, he proposed a bold increase in the risk weight (RW) for bank mortgage loans. The Financial Services Commission plans to raise the minimum RW for mortgage loans from the current 15% to 20% next year to curb banks' real estate lending. If the RW for mortgage loans increases, banks will have to either accumulate more capital or reduce risk assets, thereby limiting their capacity for real estate-backed lending.

He commented, "Raising the minimum RW for mortgage loans to 20% will not be very effective," and pointed out, "It needs to be raised to at least 25% for banks to actively reduce real estate-backed lending." He added, "Some countries, such as Hong Kong and Sweden, already apply a 25% RW, and Korea is fully capable of doing the same." He also emphasized, "Although the total household loan balance in Korea is 1,300 trillion won, the annual new loan issuance is only about 50 to 60 trillion won, so a 20% increase will not have a significant impact. The key is to recover loans to multiple-home owners, and to do this, the RW ratio must be raised even further."

Lim noted that the economic contribution of the financial industry has declined since the 2008 global financial crisis, and argued that a transition to productive finance is essential to address this. He explained, "The International Monetary Fund (IMF) and the World Bank (WB) have published research showing that once finance exceeds a certain threshold, it actually becomes an obstacle to economic development," and added, "Similar findings have been observed in Korea." He continued, "In 1980, the ratio of financial asset accumulation to GDP in Korea was 1:1, but 30 years later, it had changed to 1:3.5, indicating a substantial accumulation of financial assets. While banks are posting record profits, real economic growth has fallen to the 0% range, which is a phenomenon resulting from the excessive expansion of non-productive finance compared to productive finance." Lim stressed, "For the growth of the real economy and the long-term development of the financial industry, Korean finance must be transformed into productive finance."

He suggested that the government should take the lead in providing banks with corporate information infrastructure to enhance the effectiveness of productive finance policies. This would reduce the cost burden on banks for corporate due diligence. Lim noted, "The Financial Services Agency of Japan collaborates with economic organizations to provide corporate information infrastructure to regional banks," and explained, "The government is leading the transition to productive finance."

He also advised that for the Lee Jaemyung administration's 150 trillion won 'National Growth Fund' to succeed, industry experts must be actively involved in major decision-making processes. He emphasized, "If investment management is centered only on financial experts, there is a risk of missing out on investments in high-growth industries and companies due to an excessive focus on returns," and added, "For the National Growth Fund, the actual effectiveness of investment execution is more important than returns."

Im Sugang, Vice Chairman of the Production and Inclusive Finance Research Association, is being interviewed on the 17th at Asia Media Tower in Jung-gu, Seoul. Photo by Kang Jinhyung

The following is a Q&A with Vice Chairman Lim

-What is productive finance?

▲Productive finance refers to financial resources being allocated to productive areas such as new corporate investments, replacement investments, and operating capital. Finance for labor force reproduction or securing housing is also considered productive finance. In contrast, finance that merely transfers ownership of real estate or securities is non-productive finance. Korea has a high ratio of credit supply to the real estate sector, which is a representative example of non-productive finance.

-Why should Korea's financial industry transition to productive finance?

▲In 1980, the ratio of financial asset accumulation to GDP in Korea was 1:1, but 30 years later, it increased to 1:3.5. However, this did not translate into economic development. After the 2008 global financial crisis, the IMF and WB found that while finance helps economic growth up to a certain point, it becomes a hindrance once it exceeds a threshold. Research shows that Korea has already surpassed this threshold. Banks are posting record profits, but real economic growth is in the 0% range. This is due to the excessive expansion of non-productive finance. To ensure the sustainable growth of the real economy and the financial industry, finance must be shifted to productive uses.

-How can the concentration of banks' real estate-backed lending be reduced?

▲After the foreign exchange crisis, overseas capital took control of commercial banks, shifting their business strategies from corporate lending to personal secured lending. Before the crisis, corporate loans accounted for 80% and personal loans for 20%, but now personal loans have reached 55%. Speculative real estate finance must be strictly regulated. The risk weight in the calculation of the Bank for International Settlements (BIS) capital adequacy ratio can be increased. The risk weight for household loans is 17-18%, but it could be raised to 25%. Hong Kong already applies 25%. While the Korean government plans to raise the risk weight for household loans in the BIS ratio from 15% to 20% starting next year, this will have little effect. Out of the 1,300 trillion won in household loans, only 50 to 60 trillion won are new loans annually. Among mortgage loans, loans to single-home owners account for two-thirds, while loans to multiple-home owners account for about one-third. Recovering loans to multiple-home owners is crucial. The RW ratio must be raised. In addition, the Bank of Korea's Monetary Policy Committee could strengthen regulations such as the loan-to-value (LTV) ratio or the debt-to-income (DTI) ratio. On the other hand, incentives should be provided for banks to increase productive finance activities by having the public sector bear the cost of corporate information infrastructure. This means the public sector would cover the costs banks incur in identifying investment targets.

-What are some overseas cases of transitioning to productive finance?

▲Korea has only two regional banks, but Japan has 62. The Financial Services Agency of Japan actively supports regional banks in their corporate lending operations. This is called 'relationship banking.' To realize relationship banking, the Financial Services Agency, together with economic organizations, provides banks with corporate information infrastructure and leads the transition to productive finance.

-There are concerns that productive finance could undermine bank soundness.

▲If banks reduce household lending and increase corporate lending, the volume of risk assets will grow. However, the original social function of banks is to assume risk. If banks do not take on risk, it is not finance. What matters is managing risk at an appropriate level, not avoiding risk altogether. As seen in the US subprime mortgage crisis, mortgage loans are not always safe.

-Why did the Moon Jaein administration's productive finance policy fail?

▲Expanding productive finance and reducing non-productive finance are two sides of the same coin. Without reducing non-productive finance, productive finance cannot be increased. The Moon Jaein administration failed to sufficiently reduce non-productive finance. Despite many regulations, such as a total ban on mortgage loans for apartments over 1.5 billion won, mandatory holding periods, and the designation of regulated areas, the total volume of mortgage loans actually increased. The failure to adequately regulate non-productive finance was the reason for this failure. The same applies to the Lee Jaemyung administration. Unless non-productive finance is strictly reduced, productive finance cannot be expanded.

-What is needed for the success of the Lee Jaemyung administration's National Growth Fund?

▲It is crucial to properly select promising industries and companies. Industry experts should make the decisions. Until now, decisions have been left to financial experts. Financial experts tend to prefer investing in low-risk areas rather than taking risks. Such funds should not be evaluated solely on returns. What matters more is the actual execution of investments. The problem is that investments are not being executed, which is due to the lack of integration with industry experts. Competent industry experts must manage the National Growth Fund.

-Will productive finance help reduce financial exclusion?

▲If productive finance expands and non-productive finance contracts, the number of financially excluded groups can be reduced. Young people, temporary workers, and day laborers are representative examples. Surprisingly, there are a significant number of young people in this group. If they escape financial exclusion, the country can prevent the loss of its workforce. For productive finance to be effective, it is not enough for only the financial sector to be productive; highly productive companies must also create many jobs.

-Banks are expressing dissatisfaction with the introduction of the government's unilateral binding force.

▲There are calls for banks to pay higher contributions or windfall taxes because they are making too much profit. If banks (and the financial sector) are making more profit than industry, it means the industrial sector is shrinking. It also means banks are not fulfilling their proper function. The average profit rate of banks should be similar to the social average. Some argue that Korean banks' profit rates are not higher than those in other countries, but that is not true. In reality, they are much higher.

-What is the impact of real estate concentration on the national economy?

▲The example of Japan in the 1980s is instructive. Japanese finance funneled social capital into real estate and capital markets, while the public engaged in real estate and stock market speculation. Social capital was excessively allocated to asset markets, and the public's energy was wasted in these markets. The result was the 'lost decade,' or arguably the 'lost 30 years.' Korea may already be at the beginning of its own 'lost years.' If the economic growth rate is in the 1% range, it is considered a lost period, and this year, growth may not even reach 1%. The concentration of funds in real estate is a major factor dragging down economic growth. The 'revenge of the bubble' may already be underway.

◆Profile of Lim Sugang, Vice Chairman of the Production and Inclusive Finance Research Association

▲Graduated from Korea University Business School in 1985 ▲Discharged from the Air Force as an officer in 1988 ▲Joined Dongseo Securities as a bond trader in 1988 ▲Worked at Bank Research Institute in 1997 ▲Earned a master's degree in economics from Chonnam National University and taught political economy in 2000 ▲Earned a Ph.D. in economics from Chonnam National University Graduate School in 2006 ▲Served as a research fellow at the Institute for Financial Economics in 2008 ▲Led 'Basic Finance' research at Gyeonggi Research Institute in 2020 ▲Appointed Vice Chairman of the Production and Inclusive Finance Research Association in 2025