Manufacturing Loans Shift Toward Working Capital, Raising Concerns

The South Korean government is accelerating its push for 'productive finance' to curb household loans and increase funding for businesses. However, over 80% of the increase in manufacturing loans has been directed toward working capital rather than facility investments that enhance production capacity. This trend raises concerns about the effectiveness of productive finance.

According to data from the Bank of Korea on October 11, manufacturing loans from deposit-taking institutions increased by 8.4 trillion won in the second quarter of this year, a decrease of 2.6 trillion won compared to the first quarter's increase of 11 trillion won. However, this figure is an increase of 2.6 trillion won compared to the same period last year, which saw an increase of 5.8 trillion won. The combined increase from the third and fourth quarters of last year, which totaled 4.1 trillion won and 1.5 trillion won respectively, is also surpassed.

The issue lies in the allocation of the loan funds. Of the 8.4 trillion won increase in manufacturing loans in the second quarter, 7 trillion won, or 83.3%, was allocated to working capital. In contrast, the increase in facility funding, which is used for factory expansion and machinery acquisition, was only 1.4 trillion won. This represents a significant drop from the 4.4 trillion won increase in the first quarter, while working capital rose from 6.6 trillion won to 7 trillion won during the same period.

A similar trend is evident in overall industrial loans. In the second quarter, industrial loans from deposit-taking institutions increased by 30.6 trillion won compared to the previous quarter, with working capital accounting for 23.8 trillion won, or 77.8%. The increase in facility funding was 6.9 trillion won, down 2.5 trillion won from the previous quarter.

Since last year, the government has emphasized the need to redirect funds from non-productive sectors, such as real estate, to corporate investments and advanced industries through productive finance. President Lee Jae-myung also highlighted the importance of channeling public funds into productive areas during a press conference shortly after taking office in July of last year.

While there has been a noticeable increase in funding for the manufacturing sector, experts caution that an increase in loans does not necessarily translate to improved productivity for businesses. Working capital is essential for maintaining production activities, such as purchasing raw materials and paying wages, but it remains to be seen whether it leads to new investments or technological innovations.

Professor Cho Dong-geun of Myongji University stated, "What matters more than the slogans of productive finance or inclusive finance is whether the loan funds are actually used where they are needed and contribute to economic activity." He added that while working capital is necessary for sustaining production activities, it should not be simply compared to facility funding when assessing performance. Ultimately, funds should be directed toward areas that enhance corporate productivity, such as research and development (R&D) and technological innovation.

The Korea Financial Research Institute also noted in a report released in May that the key issue for future productive finance loans will be how effectively they flow to companies that create high added value, emphasizing the importance of selective and focused allocation of funds.

In line with the government's push for productive finance, banks are expected to enhance their credit assessment and post-management capabilities. Reducing reliance on real estate collateral and expanding funding based on companies' technological capabilities, business viability, and future cash flows will require banks to consider more factors during the assessment process and continuously monitor companies' repayment abilities after loans are issued.

A financial industry official remarked, "Manufacturing loans involve more factors to consider in the assessment process compared to real estate collateral loans, such as technological capabilities and business viability. Banks are also expanding the use of technology credit evaluations and strengthening risk management capabilities through the recruitment of specialized personnel and the establishment of dedicated organizations."