"The Regions Hurt More"... Local Banks' Complaints Hit Hard by COVID-19 Impact

[Asia Economy Reporter Kim Hyo-jin] Regional banks have appealed to financial authorities for the reform of regulations and systems related to loan operations and fund management. This is a manifestation of their sense of crisis amid the structural recession deepening due to the rapid freezing of the regional economy and deteriorating profitability caused by the aftermath of COVID-19. Regional banks unanimously agree that if the current situation continues, the function of fund intermediation within the region will be further damaged and the recession will inevitably become prolonged.

According to financial authorities and the banking sector on the 17th, regional banks such as Busan, Daegu, Gyeongnam, Gwangju, Jeonbuk, and Jeju Banks recently prepared a "Development Direction for Regional Banks" considering the difficulties in the regional economy and fund flow, and submitted it to the financial authorities.

Regional banks particularly insist that the current 60% mandatory lending system for small and medium-sized enterprises (SMEs) should be promptly revised. The asset quality has significantly deteriorated due to the mandatory lending ratio being much higher than that of commercial banks (45%). Accordingly, regional banks requested the creation and application of preferential measures such as expanding financial support when increasing the loan ratio to local SMEs and special budget allocations for expanding management stabilization funds for key regional industries.

As concerns about insolvency increase, the costs for loss provisions and restructuring rise, leading to a vicious cycle of shrinking profitability and business capacity. These issues are clearly reflected in the performance of regional banks last year.

Busan Bank's net profit last year was 308.4 billion KRW, down 17.7% from the previous year; Gyeongnam Bank recorded 164.6 billion KRW, a 9.4% decrease; Gwangju Bank's net profit was 160.2 billion KRW, down 7.5%; Daegu Bank's net profit fell 15.6% to 238.3 billion KRW; Jeju Bank's net profit dropped sharply by 37.3% to 17.5 billion KRW. Among regional banks, only Jeonbuk Bank increased its net profit.

Increase in Loss Provisions and Restructuring Costs

The difficulties faced by regional banks are directly attributed to costs such as voluntary retirement and COVID-19 related provisions. Busan Bank spent 60.3 billion KRW on voluntary retirement costs last year and set aside 87 billion KRW in provisions; Gyeongnam Bank spent 31.1 billion KRW on voluntary retirement and set aside 52.6 billion KRW in provisions. Gwangju Bank also recorded a provision expense of 48.9 billion KRW, 23.0% higher than the previous year.

Daegu Bank set aside 222.1 billion KRW in loan loss provisions and spent 18.6 billion KRW on voluntary retirement costs. A regional bank official lamented, "As the economic downturn expands corporate insolvencies and profitability declines due to the ultra-low interest rate environment, the role of regional banks supporting the local economy is increasingly fading."

Regional banks also proposed expanding their role by allowing them to handle loans from the Housing and Urban Fund. Although regional banks are trustees of the Housing and Urban Fund, they are currently unable to conduct loan operations and can only handle the Housing Subscription Savings accounts.

They argue that improving this would reduce unnecessary transaction costs for local Housing and Urban Fund loan applicants, increase convenience in financial transactions by utilizing dense local branch networks, and promote the fundamental operational philosophy of the Housing and Urban Fund, which is to enhance housing welfare for low-income households.

The Housing and Urban Fund has total assets of approximately 171.3 trillion KRW, making it the largest among 48 business-type national funds. It is used for various types of low-interest loans aimed at improving housing welfare for low-income households.

"Urgent Need to Expand Regional Banks' Participation in Policy Projects"

Regional banks also complained that despite their contributions to the local economy, they are often excluded from policy fund allocations for national projects implemented within specific regions. In most cases, commercial banks are selected as handling institutions when funds are raised.

Regional banks requested ▲support for expanding their participation in government and local government policy projects ▲expansion of operational funds within the region through the regional allocation of public funds and funds ▲introduction of systems allowing public funds and various funds raised locally to be utilized as regional development funds through regional banks.

A regional bank official said, "For balanced development of the regional economy, financial activities within the region need to be more active centered on local banks. Without institutional reforms, regional finance and the economy will find it difficult to emerge from the tunnel of the COVID-19 crisis."

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