"Policy Financial Institutions Should Reduce and Streamline Post-Restructuring Functions"

[Asia Economy Reporter Yoo Je-hoon] Amid the recent years' major industrial restructuring led by policy financial institutions such as Ssangyong Motor and Daewoo Shipbuilding & Marine Engineering failing to gain momentum, there have been calls to streamline various corporate support programs by consolidating them and to reduce the ex-post restructuring functions.

On the morning of the 19th, Koo Jeong-han, a research fellow at the Korea Institute of Finance, stated this at a discussion forum titled "Problems and Innovation Tasks of Policy Finance: Focusing on the Role Reorganization of the Korea Development Bank," hosted by Yoon Chang-hyun, a member of the People Power Party (National Assembly's Political Affairs Committee), held at the National Assembly Members' Office Building in Yeouido, Seoul.

According to Research Fellow Koo, domestic policy finance is concentrated on small and medium-sized enterprises (SMEs) with a high possibility of market failure, and multiple policy financial institutions continue to provide various forms of support to similar target groups. The scale of public guarantees for domestic SMEs is 4.06% of the Gross Domestic Product (GDP), which is significantly larger compared to other OECD countries except Japan (5.68%).

This trend has continued even after the COVID-19 pandemic. Koo noted, "The likelihood of a decrease in companies showing signs of insolvency, which are subject to ex-post corporate restructuring, is low. Moreover, when the maturity extension and repayment deferral measures end, the number of target companies is expected to increase," adding, "A fundamental review of the role of policy finance in ex-post corporate restructuring is necessary."

The problem is that ex-post restructuring by policy financial institutions is becoming increasingly difficult. As the scope of creditors subject to the Corporate Restructuring Promotion Act expands, coordinating stakeholders has become more challenging. Additionally, since the financial crisis, the importance of business areas as well as financial aspects in the restructuring process has increased, making it difficult for policy financial institutions and other creditors to lead restructuring efforts based solely on their expertise.

Therefore, Research Fellow Koo advised the need for streamlining policy finance through a whole-of-government cooperation system, selective support, reduction of ex-post restructuring, and support for proactive restructuring. He said, "Policy financial institutions tend to expand their asset size independently, which may lead to overlapping support programs among them. Therefore, it is necessary to identify and streamline overlapping policy finance support programs," and added, "Also, universal support should be reduced and shifted to a selective support system."

He further stated, "It is inefficient for policy financial institutions to lead ex-post restructuring as the main creditor banks. It is preferable to promote ex-post restructuring through rehabilitation procedures and private equity funds (PEFs)," and emphasized, "For existing industries, efforts should move toward strengthening proactive business restructuring support that is efficient and has a higher chance of success."

Voices calling for changes in policy financial institutions such as the Korea Development Bank continued in the subsequent discussion. Yoon Man-ho, former president of Korea Development Bank Financial Group, said, "Among the corporate restructuring tasks of policy financial institutions, the more important aspect is taking proactive measures to prevent the occurrence of restructuring companies," adding, "The Korea Development Bank is currently performing this function, but if necessary, recruiting experts and developing techniques will be further required."

Park Chang-gyun, director of research coordination at the Korea Capital Market Institute, proposed establishing a "Small and Medium Enterprise Policy Finance Corporation." He said, "Through establishing a holding company-type corporation, it is necessary to control the total amount of policy funds and improve the efficiency of resource allocation," and pointed out, "In the case of the Korea Development Bank, the SME support and commercial finance sectors should be transferred to the corporation or privatized, while focusing capabilities on restructuring finance and investment in innovative companies."

Assemblyman Yoon summarized, "It can be summed up in the phrase '㈜㈜'." He stated, "As doubts arise about the capabilities of policy financial institutions as restructuring problem solvers, the role of the Korea Development Bank must evolve amid the restructuring of the domestic industrial structure, and its independence from the administration must also be enhanced."

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