"Redirecting Just 10% of Household Loans to Corporates Could Raise Growth Rate by 0.2%"

Bank of Korea Releases 'BOK Issue Note' Report
Growth Boost Stronger for Firms with High Capital Productivity
"Excessive Credit Supply Can Lead to Lower Growth... Caution Needed"

A study has found that even if just 10 percentage points of funds currently concentrated in real estate and other household assets were redirected to corporate investment, South Korea's long-term growth rate could increase by 0.2 percentage points.

On December 9, the Bank of Korea announced these findings in its report, "BOK Issue Note: Redirecting Fund Flows to the Productive Sector and Revitalizing Growth." The report was released at a policy symposium co-hosted by the Bank of Korea and the Korean Finance Association.

According to research by Hwang Indo, Director of the Monetary and Financial Research Department at the Bank of Korea, and his team, who analyzed data from 43 countries using Bank for International Settlements (BIS) credit statistics from 1975 to 2024, long-term growth rates improve when the share of credit to the productive (corporate) sector is higher than that to households, even if the total amount of private credit remains the same. Specifically, the analysis found that if the proportion of corporate credit in private credit increases by 10 percentage points, the long-term economic growth rate rises by 0.44 percentage points.

Based on this, the researchers simulated a scenario where the ratio of household credit to GDP in South Korea is reduced by 10 percentage points (from 90.1% to 80.1%) and the ratio of corporate credit is increased by the same amount (from 110.5% to 120.5%), while keeping the total amount of private credit unchanged. The results showed that the country's long-term economic growth rate would rise by 0.2 percentage points through credit reallocation alone. Assuming an average annual growth rate of 1.9%, this means the rate could increase to 2.1%.

Director Hwang explained, "This is interpreted as an improvement in corporate funding conditions leading to increased real investment, which in turn boosts productivity. The increase in corporate credit eases financial constraints, raises corporate investment rates, and ultimately improves labor productivity, thus acting as a positive factor for long-term growth."

However, the report noted that the growth-enhancing effects of such credit reallocation vary by industry. According to the Bank of Korea's research, credit supply to real estate and construction sectors does not contribute to improvements in economic growth or productivity. In contrast, in sectors other than real estate and construction, a 1 percentage point increase in credit leads to a 0.026 percentage point rise in economic growth and a 0.013 percentage point increase in total factor productivity.

The study also found that credit growth has a more positive impact on corporate growth in industries with high capital productivity, small and medium-sized enterprises (SMEs), and sectors with a high dependence on external funding. The report assessed that newly established companies, which tend to have both high productivity and high reliance on external capital, could see significant growth effects from increased credit supply.

However, the report also pointed out that excessive credit supply could actually hinder economic growth. Director Hwang stated, "When corporate credit exceeds a certain level, we observed a decline in economic growth. Excessive credit expansion can lead to capital being allocated to less efficient sectors or cause overinvestment, delaying the exit of marginal companies and ultimately undermining growth potential."

The Bank of Korea recommended adjusting credit supply incentives for financial institutions and building evaluation infrastructure for the business performance and technological capabilities of SMEs and startups, in order to redirect funds currently concentrated in real estate and households toward corporations.

Specifically, the report suggested strengthening risk weights for household loans such as mortgage loans and considering the introduction of "sectoral countercyclical capital buffers" for non-productive sector credit. At the same time, to encourage credit supply to SMEs, the report recommended benchmarking Europe's "SME Supporting Factor" system, which lowers risk weights for SME loans, and applying it to the South Korean context.

The report also emphasized the need to establish credit evaluation infrastructure specialized for SMEs to improve current lending practices, which are heavily reliant on balance sheets, collateral, and guarantees. It suggested actively utilizing existing evaluation models such as "K-TOP" (an open technology assessment platform developed by the Korea Technology Finance Corporation) or even establishing specialized credit rating agencies for SMEs.

Director Hwang stated, "It is also necessary to promote capital-based funding by strengthening the functions of the capital market centered on the stock market and revitalizing venture capital. To this end, policies to strengthen shareholder rights protection and eradicate market-disrupting activities should be continuously pursued to encourage investment in the domestic capital market. At the same time, activating exit markets such as mergers and acquisitions (M&A) and initial public offerings (IPOs) is needed to increase private investment incentives."

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