"Breathe Easier with System Reforms"…Regional Banks Appeal to Financial Authorities (Comprehensive)

[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 local 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 impaired and the recession will inevitably become prolonged.

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

Regional banks particularly insist that the mandatory loan system for small and medium-sized enterprises (SMEs), currently set at 60%, should be promptly revised. The asset quality has significantly deteriorated due to the much higher mandatory loan ratio compared to commercial banks (45%). Accordingly, regional banks have 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 to expand management stabilization funds for key local industries.

As concerns over insolvency rise, losses and restructuring costs increase, 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 income last year was 308.4 billion KRW, down 17.7% from the previous year; Gyeongnam Bank's was 164.6 billion KRW, down 9.4%; Gwangju Bank's net income also decreased by 7.5% to 160.2 billion KRW. Daegu Bank recorded 238.3 billion KRW, a 15.6% drop. Jeju Bank's net income fell sharply by 37.3% to 17.5 billion KRW. Among regional banks, only Jeonbuk Bank increased its net income.

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 and set aside 52.6 billion KRW respectively. 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. The rapidly changing financial environment, including the expansion of non-face-to-face financial transactions and the entry of big tech (large information and communication companies) and fintech (financial technology) firms into the financial industry, is also putting pressure on regional banks.

An official from a regional bank lamented, "As corporate insolvency expands amid the economic downturn and profitability declines due to the ultra-low interest rate policy, the role of regional banks supporting the local economy is increasingly fading."

Regional banks also proposed expanding their role by allowing them to handle loan products 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 comprehensive 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 when policy funds related to national projects are allocated, even if the projects are implemented within specific regions. In most cases, commercial banks are selected as handling institutions when funds are raised.

Regional banks requested ▲support for expanding regional banks' 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 that allow public funds and various funds raised locally to be used as regional development funds through regional banks.

An official from a regional bank said, "For balanced development of the local 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.