[Change the Flow of Capital]⑦"Limits of Loan Expansion... Productive Finance Must Shift to Investment-Centered Approach"

Experts agree that for productive finance to take root, it is necessary to fundamentally transform the overall structure of the financial system, rather than simply increasing the scale of funds. They point out that if the approach remains focused on "expanding loans," as in the past, it will inevitably repeat the limitations faced by previous initiatives such as creative finance or green finance. The suggestion is that the policy focus must shift from the issue of "where to allocate money" to "how to ensure the proper flow of funds" through system design.

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Donghyun Ahn, Professor of Economics at Seoul National University, explained on April 29, "In the past, 80% to 90% of bank loans went to businesses, but after the International Monetary Fund (IMF) currency crisis, the proportion of household loans has risen to over 70% due to stronger regulations and policy changes." He added, "The reason banks are focusing more on household loans than business loans is not simply for profit, but because the current regulatory and supervisory framework drives them in that direction."

The problem is that this conservative structure is in conflict with the expansion of productive finance. When a business loan becomes non-performing, banks are held accountable for credit assessment and face strict sanctions, but even if the business grows significantly, the bank's additional profit is limited. Consequently, banks are inevitably structured to prioritize loss avoidance over profit maximization. Yongjin Kim, Professor of Business Administration at Sogang University, also analyzed, "Given that commercial banks are organizations where soundness management is the top priority, it is inevitable that they prefer safer household loans over riskier business loans."

To break these practices, there are calls for excessive regulations to be relaxed first. Professor Ahn noted, "Excessive application of regulations such as the Bank for International Settlements (BIS) capital adequacy ratio and liquidity requirements has left banks virtually unable to act," and pointed out, "At the end of the year, when regulatory ratio limits are reached and corporate loan demand rises, banks are repeatedly unable to supply loans." He argued that partial relaxation of capital adequacy requirements and risk weights (RW) is needed to give banks more flexibility.

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Jiyong Seo, Professor of Business Administration at Sangmyung University, suggested that to compensate for the structural limitations of banks, policy finance should play a "priming" role by absorbing initial risks to attract private capital. He stated, "Policy finance should be structured so that it proactively bears risk, followed by private capital," and emphasized, "Venture capital supply needs to be expanded not only for advanced industries, but also for ventures scaling up and regional innovation, ensuring risk capital is provided across the board."

Past green finance and creative finance initiatives are positively evaluated for pioneering new domains-climate finance and venture finance, respectively-and building essential infrastructure. Green finance established the foundation for climate-related finance through the introduction of the emissions trading system and the development of the green bond market. Creative finance, by setting up the Creative Economy Innovation Center and D.CAMP, expanded the venture and startup finance ecosystem. A Financial Services Commission official explained, "Green finance and creative finance are significant not as complete policies, but in that they created new financial domains, establishing related systems, markets, and infrastructure." However, the prevailing view is that, as the focus remained on loan expansion, there were clear limitations in shifting the method of capital supply to "investment."

The productive finance initiative currently being promoted is a step beyond previous policies. This is because, rather than simply allocating funds to specific industries, it seeks to reshape the flow of funds throughout the entire financial system. Experts agree that the focus should be on shifting the method of capital supply from loans to investments, learning from the shortcomings of previous approaches.

Professor Kim commented, "Both tech finance and green finance ultimately ended up as policies that increased lending to companies in specific sectors," adding, "The approach of supplying capital through banks has been repeated due to the underdeveloped capital market." He identified the root causes of these structural limitations as the weak capital market and the bank-centric financial structure. Kim pointed out, "If you look at Korea's exit market, over 90% consists of initial public offerings (IPO), while mergers and acquisitions (M&A) make up a negligible portion," highlighting the lack of circulation for investment capital. He argued that institutional improvements related to the capital market must be pursued in parallel. Specifically, he called for diversifying the IPO-centered exit structure, expanding M&A channels, and easing regulations to activate investment vehicles such as business development companies (BDC) to promote a virtuous cycle of investment capital.

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Korea faces limitations in implementing large-scale subsidy policies like China due to national debt and fiscal constraints. Therefore, there is a growing call for a powerful control tower to efficiently manage the various policy funds already in existence. Professor Ahn stated, "There is already ample policy finance available through institutions such as Korea Development Bank, Export-Import Bank of Korea, IBK, the Korea Fund of Funds, and Growth Finance. The best approach would be to coordinate these funds integrally and then add supplementary resources." He criticized, "Currently, there is a lack of basic blueprints for capital procurement structures, investment portfolios, and risk allocation methods."

There were also repeated warnings that the government must resist becoming preoccupied with "numbers" such as performance indicators or amounts of funding. Jinyoung Shin, Professor of Business Administration at Yonsei University, advised, "Setting a target amount and investing just to meet performance figures is highly likely to result in failure. There must be a system for rigorous selection of investment targets and long-term management in cooperation with the private sector." Seokki Kim, Senior Research Fellow at the Korea Institute of Finance, also stressed, "If capital is hastily deployed to generate short-term results, investment efficiency will suffer. A sophisticated approach that prioritizes investment quality over speed is required."

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