'Tuja Miae' Companies, 300 Trillion Won in Bank Large Deposits Only... Polarization of Fundraising (Comprehensive)

Over 80 Trillion Won Increase in Time Deposits Over 1 Billion Won in 2 Years... Domestic and Foreign Economic Uncertainty Leads to Cash Reserves
Funding Difficulties for SMEs Double in a Year... Market Funds Not Circulating Despite BOK Rate Cuts

Liquidity Trap? Large Corporations Accumulate Cash vs. SMEs Face Funding Polarization
Recession, Stock Market Slump, Real Estate Regulations Lead Large Firms to Hoard Cash Without Investment
SMEs Struggle to Get Bank Loans, Funding Issues... Non-Bank Loans Up 21% in 10 Months

[Asia Economy Reporters Haeyoung Kwon, Minyoung Kim]

<1>'Investment迷兒' Companies, 300 Trillion Won in Large Bank Deposits

Over 80 Trillion Won Increase in Time Deposits Over 1 Billion Won in Two Years... Domestic and Foreign Economic Uncertainty Leads to Accumulation of Idle Funds

Funding Difficulties for SMEs Double in One Year... Even with Bank of Korea Rate Cuts, Money Does Not Circulate in the Market

Companies are significantly increasing the amount of money they keep in banks. Instead of executing new investments for mid- to long-term financing, they are accumulating funds in banks without finding places to spend them. Meanwhile, a polarization in financing conditions is becoming evident, with borrowing conditions worsening mainly for large corporations and small and medium-sized enterprises (SMEs) with lower credit ratings.

According to the Bank of Korea and financial institutions on the 13th, the balance of time deposits over 1 billion won at four major commercial banks?Shinhan, KB Kookmin, KEB Hana, and Woori Bank?reached 293.5032 trillion won at the end of last year. This is an increase of 80 trillion won over two years compared to 214.2136 trillion won at the end of 2017. The number of accounts with time deposits over 1 billion won also increased from 30,561 at the end of 2017, to 32,054 at the end of 2018, and 34,426 at the end of last year.

A financial industry official said, "Most large depositors with over 1 billion won in time deposits are corporations rather than individuals (including sole proprietors). When the economy is good, companies proactively increase investments in preparation for the future, but currently, due to domestic and international economic uncertainties, they are retaining surplus funds internally." In other words, money that cannot find investment destinations due to the current deteriorating economic conditions is accumulating in banks.

The same applies to individuals who cannot find investment opportunities. A representative from a commercial bank said, "Individual funds are also becoming more conservative overall, unable to flow into the stock market due to the economic downturn and reduced corporate profit outlooks, compounded by real estate regulations."

While large deposits over 1 billion won accumulate in banks, the number of SMEs facing funding difficulties is increasing. According to the '2019 SME Financial Condition Survey Report' published by the IBK Industrial Bank of Korea Economic Research Institute, the proportion of SMEs that responded that overall borrowing conditions worsened after receiving new loans from banks nearly doubled from 17.6% in 2017 to 31.9% in 2018. The main reasons cited were an increase in interest rates, rising from 35.2% to 42.8%, and worsening credit loan borrowing conditions, increasing from 19.3% to 32.8%.

Ultimately, even if the Bank of Korea lowers interest rates, the stagnation of money circulation in the market is intensifying. According to the Bank of Korea, the money multiplier, which indicates how much money distributed by the government circulates in the private sector, was at a record low of 15.7 times as of the end of September last year. When the money multiplier declines, even if the government injects money, it does not circulate within financial institutions, reducing the effect of amplifying the money supply. The velocity of money, which shows how many times one unit of currency is used for the production of goods and services by economic agents, also fell to a record low of 0.68 in the first quarter of last year and remained low at 0.69 in the second quarter.

With the economic slowdown, the business environment for SMEs has worsened due to minimum wage increases and the introduction of the 52-hour workweek. The proportion of SMEs with an interest coverage ratio below 1, meaning they cannot even cover interest expenses with operating profits, rose to 49.7% in the first half of last year, an increase of over 10 percentage points compared to 38.2% in 2014.

A senior official from the financial authorities said, "This year’s banking supervision direction is to open the way for market funds to flow into productive and innovative sectors, namely companies." He added, "Many companies complain of funding difficulties, but under the uncertain economic outlook, it is challenging to induce funding to productive areas with low risk of insolvency, which is a major concern."

<2>Liquidity Trap? Large Corporations Accumulate Cash vs. SMEs Struggling with Funding 'Polarization in Financing'

Recession, Stock Market Slump, Real Estate Regulations Lead Large Corporations to Hoard Cash Without Investment Destinations

SMEs Face Funding Difficulties Unable to Obtain Bank Loans... Non-bank Loans Increase 21% in 10 Months

The accumulation of money deposited by companies in banks is interpreted as directly linked to the recent economic situation where internal reserves have no suitable investment destinations. As domestic and international economic conditions become uncertain, companies reduce facility investments and sell real estate to accumulate cash assets. Despite the monetary authorities injecting money, money does not circulate in the market, a phenomenon known as 'money stagnation,' and funding difficulties are intensifying mainly for SMEs. As investment sentiment shrinks amid economic slowdown forecasts, SMEs inevitably suffer damage. Individual funds also fail to flow into any particular sector such as stocks or real estate. There are concerns that funds circulating in the market may find regulatory loopholes and flow into real estate amid the liquidity trap.

◆Recession, Stock Market Slump, Real Estate Regulations Leave Money Nowhere to Go= The biggest cause of money stagnation, where money does not circulate despite monetary authorities injecting funds, is the economic downturn. The prolonged US-China trade dispute continues to depress manufacturing and investment, accelerating domestic economic recession. Increasing external uncertainties such as Japan, North Korean nuclear risks, and the Iran situation are also cited as reasons companies are holding back.

According to Statistics Korea, the domestic facility investment growth rate turned negative at -4.8% in the second quarter of 2018 and has recorded negative growth every quarter since. Last year, it was -19.6% in the first quarter, -8.7% in the second, -3.7% in the third, and negative growth is expected in the fourth quarter as well. This year’s economic situation is not favorable, making it difficult for market funds to lead to investment and consumption. The Bank of Korea forecasts economic growth at 2.3%, and the Ministry of Economy and Finance at 2.4%, but some private institutions predict growth as low as 1.8%.

SMEs and individuals also find it difficult to find new investment destinations. Due to worsening domestic and international economic conditions, funds cannot flow into the stock market. Demand for financial investment products has also significantly decreased following last year’s major overseas interest rate-linked derivative-linked securities (DLS) incident, which caused large losses to investors. Real estate has turned into a wait-and-see mood due to government regulations.

A representative from a commercial bank said, "Even small and medium-sized corporations put tens of billions of won into financial investment products like DLS and suffered losses." He added, "Due to the DLS impact, not only individuals but also corporations are locking up surplus funds in time deposits or liquid funds rather than investment products."

◆Large Corporations with No Place to Spend Money vs. Non-prime SMEs Struggling with Funding= While large corporations accumulate funds in banks, non-prime companies, mainly SMEs, find it difficult even to obtain bank loans. According to the Bank of Korea, corporate loans from non-bank financial institutions increased by 21.1% from 165.6571 trillion won in December 2018 to 200.7385 trillion won in October last year. During the same period, corporate loans from deposit banks increased only 5.3%, from 861.0361 trillion won to 907.0664 trillion won. Non-bank financial institutions include savings banks and Saemaeul Geumgo, mainly used by SMEs unable to obtain bank loans. The increase in high-interest loans from secondary financial institutions compared to banks indicates worsening funding difficulties and borrowing conditions for SMEs. With the economic outlook still bleak and banks tightening credit management, the financial conditions of SMEs are expected to deteriorate further, increasing the number of marginal companies.

Amid the polarization in corporate financing, some analysts warn that money held by companies and individuals without suitable investment destinations is likely to flow into real estate, considered a safe asset.

Professor Sangbong Kim of Hansung University’s Department of Economics said, "Market funds should flow into SMEs or venture companies, but both individuals and corporations are concentrating on buying land and buildings, i.e., real estate." He added, "Both companies and households already own real estate or are holding liquid funds for real estate."

Researcher Wanjung Kim of Hana Financial Management Research Institute predicted, "Surplus funds without suitable investment destinations may re-enter the real estate market." He noted, "Despite ultra-strong housing market regulations such as the December 16 measures, the expansion of social overhead capital (SoC) budget execution, including construction investment to boost economic vitality, could act as a factor increasing capital inflow into the real estate market."

This content was produced with the assistance of AI translation services.