Banks Overflow with Money... But Companies Cry Out for Cash Despite Borrowing

Banks See Surge in Demand Deposit Accounts and Overnight Funds
Turnover Rate of Demand Deposits Also Plummets
Money Unable to Find Investment Channels Flows into Safe Assets... Companies Struggle with Cash Shortages
Low Interest Rates and COVID-19 Deepen 'Money Stagnation'

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[Asia Economy Reporters Hyojin Kim and Chulhyun Kim] Although liquidity is overflowing in the market, companies are complaining of financial difficulties. While idle funds that have not found investment destinations are piling up in banks, the money is not flowing to where it is actually needed. The phenomenon of 'money stagnation,' where money does not circulate properly due to prolonged ultra-low interest rates and investment sentiment freezing caused by the novel coronavirus disease (COVID-19), appears to be intensifying. With the possibility of a second wave of COVID-19 spreading, concerns are also being raised that if banks tighten loans amid worsening financial and real economies, many companies could fall into unprecedented financial distress.

According to the financial sector and related industries on the 25th, the balance of demand deposits, including banks' actual demand deposits, reached 758.4 trillion won at the end of last month, soaring by 29.9 trillion won compared to the previous month. The increase in demand deposits from the beginning of this year to last month reached 74.7 trillion won, greatly surpassing last year's increase of 65.9 trillion won. Demand deposits allow free deposits and withdrawals but yield almost no interest income, strongly characterizing idle funds in the market that have not found a proper place. An increase in demand deposits means that the amount of 'drifting funds' has increased accordingly. This is closely related to the aftermath of COVID-19, the ultra-low interest rate policy, and the contraction of the financial investment market.

The turnover rate of deposits is also significantly declining. In April, the turnover rate of demand deposits at deposit banks was 17.2, sharply down from 19.5 in the previous month. The deposit turnover rate is calculated by dividing the amount of deposit payments by the deposit balance. A lower turnover rate means fewer deposit withdrawals occurred. It recorded an all-time low of 16.3 in February last year, rose to 20.3 at the end of last year, and is now trending downward again.

A financial sector official said, "The 'money stagnation' phenomenon is deepening due to high-intensity regulations by financial authorities following overseas interest rate-linked derivative-linked funds (DLF) and Lime Asset Management incidents," adding, "A kind of 'avoidance safety asset' is accumulating, and this trend is expected to continue for the time being."

The number of companies relying on debt is also rapidly increasing. According to the Bank of Korea, the balance of corporate loans in the banking sector reached 945.1 trillion won at the end of last month, increasing by 16 trillion won from the previous month. This increase is the third highest since statistics began in June 2009, following 27.9 trillion won in April and 18.7 trillion won in March this year. It is the largest increase on record for May. Most of the increase in corporate loans was for small and medium-sized enterprises (SMEs), amounting to 13.3 trillion won.

However, SMEs are still crying out that they lack funds. According to the Korea Chamber of Commerce and Industry's recent survey of 308 domestic manufacturing companies titled "Post-COVID Corporate Response Status and Policy Tasks," nearly half (45.2%) responded that their current business conditions have worsened compared to March and April. In particular, after exports (29.2%), financial difficulties (27.3%) were cited as the second most challenging factor.

SMEs with weak financial power, especially ventures and startups, complain that they are virtually defenseless against the aftermath of COVID-19 and other factors. The CEO of Company A, an SME, said, "Many manufacturing SMEs have seen their sales halved or reduced to one-third compared to the previous year," adding, "They have no choice but to run to banks and beg for help."

Venture companies and startups are even pushed into a 'financial blind spot' as bank loans are difficult to obtain. Choi Sung-jin, CEO of the Korea Startup Forum, lamented, "For early-stage startups, it is difficult to get loans from financial institutions unless the founder has personal collateral."

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