South Korea's financial sector overall is not excessive in its size but it has grown to above adequate levels in terms of lending, a report said Monday.
The research paper titled "Adequacy and Growth Effect of Finance in Korea," carried in the latest periodical from the Korea Institute of Finance, called attention to heavily concentrated loans to households compared to those for companies.
Data from 2002 to 2016 shows an 8.1 percent yearly average rise in household loans, compared with a 6.9 percent increase in corporate lending, the report cited.
"Our findings show that the index of financial deepening measured in terms of private credit to GDP reached 143 percent in 2016 and has entered the region where the growth effect of finance is declining," the report said.
The figures indicate that local financial companies are focused more on providing low-risk, collateralized loans instead of extending credit to companies that require monitoring and heavy qualification reviews.
The pitfall in this unbalance is that household loans are less productive than corporate loans.
"In terms of company size, indirect finance is concentrated in small firms with fewer than 50 employees. The value-added share of small firms is only 8 percent, but the indirect finance share of small firms comprises 27 percent," the KIF report said. "We have found that most of these small firms belong to low productivity sectors, such as the real estate, transportation and warehousing, wholesale and retail sales."
The latest findings conclude that the Korean financial sector cannot be considered as being excessive in size.
"However, from the credit provision perspective, we have found some signs that the level of financial deepening may have exceeded the adequate level and that the positive growth effect of finance is deteriorating," it said.
From the policy aspect, the government needs to establish a system to control excessive finance to enhance the growth effect and the efficiency of finance, the think tank report said.
"Furthermore, it is essential to find out the structural causes for the concentration of finance in low productivity sectors and prepare steps and measures to remedy the problem." (Yonhap)