[Major Shift Toward Productive Finance]⑦"Addressing Corporate Non-Performing Loan Issues... Responding with Early Warning Systems"

Interview with Kim Taehyung, Head of Management Strategy Group (Vice President) at IBK Industrial Bank
"Pursuing a Virtuous Cycle Where SME Growth Drives Bank Growth"
"Identifying High-Risk Companies with Big Data...Strengthening Real-Time Monitorin

Editor's Note
Public dissatisfaction is growing 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 is cited 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, resulting in an oversupply of credit in 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 understanding of the problem. Overseas, following the 2008 global financial crisis, financial institutions have reflected on their practices and are seeking a shift toward productive finance. In Korea as well, there are growing calls for both policy support from the government and political circles, as well as a change in mindset among financial institutions, to ensure that productive finance takes root.

Kim Taehyung, Head of Management Strategy Group (Vice President) at Industrial Bank of Korea, is being interviewed by The Asia Business Daily at the Industrial Bank of Korea headquarters in Jung-gu, Seoul. Photo by Dongju Yoon

"For productive finance to succeed, it is crucial for banks to continuously refine their corporate credit evaluation models and to develop the capability to accurately assess a company's potential and growth prospects by integrating diverse data sources."

Kim Taehyung, Head of the Management Strategy Group (Vice President) at Industrial Bank of Korea, made this statement in a recent interview with The Asia Business Daily at the bank's headquarters in Jung-gu, Seoul. The core of productive finance is a virtuous cycle in which banks provide funding to companies, and these companies, in turn, become customers of the bank. To achieve this, banks must have the ability to properly evaluate companies.

Industrial Bank of Korea has long-standing expertise in the field of small and medium-sized enterprise (SME) lending. As of the end of September, the bank's SME loans had increased by 13.2 trillion won compared to the end of the previous year, reaching a market share of 24.3%. This net increase accounts for more than half of the total net increase in SME loans across all banks (about 25 trillion won). Vice President Kim explained, "The growth of SMEs leads to the growth of Industrial Bank of Korea, which in turn allows us to expand support for SMEs, demonstrating a virtuous cycle in finance."

Employees of companies that receive loans often become individual customers as well. Employees enroll in retirement pension plans and use Industrial Bank of Korea credit cards. As companies grow and hire more staff, the number of individual customers also increases. This is the traditional business approach pursued by Industrial Bank of Korea.

"Effective Management of Non-Performing Loans is Key... Advancing Evaluation Systems such as Early Warning Systems"

However, commercial banks that have grown primarily through stable loans such as real estate-backed lending face significant challenges in risk management, especially regarding delinquency rates related to corporate loans. Industrial Bank of Korea operates big data models tailored to the characteristics of different types of businesses, such as small enterprises and startups, moving beyond the traditional credit evaluation methods focused on financial statements. This is a key differentiator for the bank in the corporate lending sector.

Vice President Kim stated, "In addition to financial metrics, we incorporate data such as electricity usage, mobile phone bill payments, and credit card transactions into our corporate loan assessments," adding, "We are also establishing an alert system for national tax arrears and public disclosures."

Industrial Bank of Korea has established a step-by-step loan review and monitoring system to identify and support companies with high growth potential, while also strengthening soundness management. During the loan origination stage, the bank uses a credit evaluation system that leverages big data and the latest dynamic information to identify high-risk companies. After loan origination, the bank manages risks through early warning and audit systems that can promptly detect signs of trouble within companies.

Through its early warning system, Industrial Bank of Korea monitors changes in corporate credit risk in real time. For companies with large loan exposures, professional evaluators conduct ongoing reviews through the credit audit system to respond to potential non-performing loan risks. Additionally, the bank plans to introduce an advanced early warning system in December that incorporates a machine learning-based default prediction model.

"For Corporate Lending, Banks Should Prioritize Quality over Quantity"

Domestic commercial banks have grown mainly through relatively safe real estate lending since the global financial crisis. Based on this business structure, they have been achieving record results every quarter. As a result, the financial sector believes it is realistically difficult to immediately change the real estate-focused business model.

Vice President Kim especially emphasized the importance of identifying which sectors of SMEs are receiving loans. He explained, "Banks are competing intensely in SME lending. The concern is not that lending is insufficient, but rather, it is important to examine how the lending is increasing." For Industrial Bank of Korea, the focus is on supplying funds to the manufacturing sector, which has a significant impact on job creation and economic growth.

Vice President Kim also predicted that the government's recent policies to curb household lending and ease regulations would help facilitate the transition to productive finance. Last month, the Financial Services Commission improved the risk-weighting on banks' equity holdings. The commission announced a plan to reduce the risk-weight ratio (RW) for unlisted stocks from 400% to 250% as part of capital regulation improvements for banks.

He stated, "Adjusting the RW is something banks have long desired," adding, "Regulatory improvements will reduce banks' capital burdens for investment activities, which will indirectly stimulate investment in venture companies."

Kim Taehyung, Head of Management Strategy Group (Vice President) at Industrial Bank of Korea, is being interviewed by The Asia Business Daily at the Industrial Bank of Korea headquarters in Jung-gu, Seoul. Photo by Dongju Yoon

The following is a Q&A with Vice President Kim

-What does productive finance mean to you?

▲Finance is about enhancing the welfare of the people. At Industrial Bank of Korea, we emphasize 'value finance.' Increasing customer value ultimately increases the value of the bank itself. Based on this, we fulfill the bank's role and create a virtuous cycle of customer value. I believe productive finance is about integrating our economy and steering it in a valuable direction. When designing any system, it is important to consider whether it benefits the bank, but it is even more important to consider whether it benefits the customer.

-Having led SME lending for a long time, does Industrial Bank of Korea have its own strategy for productive finance?

▲For a virtuous cycle to occur, we must consider where the bank's funds are flowing and whether this is desirable for society. It is natural for Industrial Bank of Korea to focus on corporate lending, but from a productivity perspective, it is crucial to manage where those funds are allocated. While the service industry is important in a resource-scarce country, the foundation lies in manufacturing. We manage our lending execution to direct funds into manufacturing, and our lending strategy is centered on this sector.

-Can you share a memorable example of a company that demonstrated a virtuous cycle?

▲Acquiring a company usually requires costs in the range of 10 billion won, and purchasing a business site typically costs about 5 billion won. When making such loans, a certain portion must be unsecured in addition to collateral. As an employee, I feel a sense of satisfaction when the business that received the loan generates stable sales, grows in size, and hires more employees.

-Industrial Bank of Korea has a long history in corporate lending. How does your evaluation system differ from commercial banks?

▲Industrial Bank of Korea has accumulated 64 years of data. At the loan origination stage, we use big data and the latest dynamic information to preemptively prevent the inflow of non-performing loans. We also monitor real-time changes in credit risk through our early warning system, and for companies with large loan exposures, professional evaluators conduct ongoing reviews through the credit audit system. In December, we will introduce an advanced early warning system with a machine learning-based default prediction model.

-A key pillar of productive finance is 'technology finance.' What expertise does Industrial Bank of Korea have in this area?

▲We request technology assessments from in-house or external evaluation agencies and issue technology assessment reports after on-site inspections. For investments, our 'Technology Investment Council,' composed of internal technology evaluation committee members, conducts in-depth assessments of a company's technological capabilities and future growth potential to determine whether to invest.

-Financial authorities want technology finance evaluations to be more detailed and to eliminate excessive practices. Are there areas you are seeking to improve?

▲The delinquency rate for technology finance loans is not higher than that for general SME loans. Even after being classified as non-performing, some loans are still recovered. While the amounts may be transferred, it does not mean that technology finance is being managed recklessly or undermining soundness. I believe companies with technology will survive longer than those without.

-The government is seeking to ease regulations related to productive finance. What do you think is needed?

▲There is a positive response on the ground to the Financial Services Commission's recent announcement to lower the risk weights for unlisted stocks and policy funds. This is expected to stimulate venture capital investment, especially among banks.

-There are concerns that it is difficult in practice to shift away from commercial banks' focus on real estate-backed lending. What is your view?

▲In the first half of this year, banks were passive in SME lending, but since the government's real estate policy announcement, support has been expanding. I believe the expansion of corporate lending is more influenced by management policy than by know-how. Commercial banks also manage about 150 trillion won in corporate loans. By strengthening regulations on household loans and easing those on corporate loans, the structure can be changed.

-The Lee Jaemyung administration is emphasizing productive finance. What role can Industrial Bank of Korea play?

▲First, we have decided to allocate 7.5 trillion won to support small business owners, from startups to scaling up. We are also sharing feedback from the field regarding customs issues with the government. In addition, we plan to participate in the 150 trillion won National Growth Fund. We are continuously reviewing and meticulously examining areas related to small business owners, long-term delinquent borrowers, and balanced regional development, which President Lee Jaemyung is emphasizing.

◆Profile of Vice President Kim Taehyung

▲Graduated from Sungkyunkwan University, Department of Law, 1994 ▲Joined Industrial Bank of Korea in 1994 ▲Head of Strategic Planning Team, Strategic Planning Department, 2014 ▲Branch Manager, Bisan-dong Corporate Growth Branch, 2016 ▲Branch Manager, Gasan Techno Branch, 2017 ▲Head of Digital Planning Department, 2018 ▲Head of Strategic Planning Department, 2022 ▲Vice President, Card Business Group and Pension Business Group, 2023 ▲Vice President, Management Strategy Group, 2024