Local lenders tighten loans, hurting smaller companies


Cash flow is slowing at a growing number of Korean firms, both big and small, sending a fresh warning signal to policymakers faced with greater economic uncertainties at home and abroad.

Industry data from the Korea Listed Companies Association, 632 firms listed on the local bourse with their fiscal year ending in December saw their cash and cash equivalents standing at 48.1 trillion won as of end-June, down 7.6 percent from 52.9 trillion won six months earlier.

The shrinking cash reserves resulted in a mismatch between the investment spending and servicing debt and the inflow of cash generated by sales.

By market capitalization, small- and medium-sized firms suffered the most, with bigger companies faring relatively better.

For instance, the top 10 firms witnessed only a 5.0 percent drop in their cash and cash equivalents during the cited period, lower than the average of the listed companies.

Hanwha Group, in particular, expanded its cash reserve by 179.5 percent. Steelmaker POSCO and Hyundai Heavy Industries increased their cash holdings by 78.0 percent and 52.0 percent, respectively. 

The broader picture, however, is gloomy. One in five listed firms suffered a net decrease of more than 50 percent in their cash and cash equivalents over a six-month period from December last year to June this year. Of the companies which saw a rapid drop of cash, 92 percent are small and midsize enterprises.
While small companies are scrambling to secure fresh funds, the liquidity situation is turning from bad to worse. Korean banks have already tightened the standards for extending loans to corporations in the name of following the state guidance. Issuing corporate bonds is also difficult due to the turbulences gripping the domestic bond market.

Korean banks are also reducing loans to small enterprises in recent months, undercutting their efforts to boost cash holdings to grapple with the economic uncertainties.

As of end-August, KB cut loans to small firms by 132 billion won from a month earlier. Shinhan Bank decreased loans by 449 billion won during the cited period. Woori Bank and Korea Exchange Bank similarly reduced the loans for medium-sized and smaller companies.

The level of urgency is greater for small Korean companies because of the greater possibility of a global economic slowdown amid concerns about the continued debt woes in the eurozone and a recession threat facing the U.S.

Korean conglomerates could sidestep the storms by issuing new shares in the stock market or securing fresh loans from commercial banks by leveraging their market influence and solid financial standing.

The situation for small, cash-strapped firms is exactly the opposite, as they could not raise the emergency funds through regular channels.

Five major lenders including KB, Shinhan and Woori slashed the loans denominated in the Korean won to 223.4 trillion won as of end-August, down 1.5 trillion won from a month earlier.

As a result, small companies are flocking to the second-tier financial sector to get loans at a burdensome interest rate.

By Yang Sung-jin (insight@heraldcorp.com)