BOK to Restructure FISL... Expanding Regional SME Support and Strengthening Monetary Policy Functions

'SME Credit-Linked Support' to Be Introduced in the Second Half of Next Year

'Regional SME Support' Program Limit to Be Increased Starting in the First Half of Next Year

Quasi-Fiscal 'Trade Finance Support' and 'New Growth and Job Creation Support'

To Be Gradually Reduced and Discontinued

The Bank of Korea will reform the Financial Intermediation Support Lending (FISL) system. The reform aims to strengthen its role as a monetary policy tool and provide greater support to regional small and medium-sized enterprises (SMEs). While maintaining the total limit of 30 trillion won, the reform will be implemented in stages, taking into account the consistency with the monetary policy stance and other relevant factors.

The Bank of Korea building. Bank of Korea.

The Bank of Korea’s Monetary Policy Board approved the reform proposal for the FISL regulations on the 23rd. The FISL is a policy tool through which the Bank of Korea supplies low-interest funds to financial institutions to help SMEs that face relatively difficult financing conditions. Its main objective is to supplement the interest rate channel's transmission effect and support the monetary policy goals of price stability and financial stability.

However, several issues have been pointed out regarding the operation of the FISL: ▲The quasi-fiscal nature of selectively supporting specific sectors has persisted, and with the size of support being fixed for a long period, a flexible response to economic changes has been restricted. ▲The widening gap between sectors and conflicts between policy variables have increased the need to strengthen the function of supplementing the base rate. ▲The FISL has failed to fully reflect changes in policy conditions, such as the expansion of the economy, resulting in diminished effectiveness.

Accordingly, the Bank of Korea announced that it has prepared a reform plan to enhance the effectiveness of the FISL as a monetary policy tool going forward.

Starting in the second half of next year, the Bank of Korea will introduce a new 'SME Credit-Linked Support' program, which will flexibly adjust and operate based on changes in economic conditions for all SMEs. Unlike current targeted support, this program will cover all SME loans, and limits will be allocated based on each bank's quarterly increase in SME loan balances.

A Bank of Korea official explained, "Previously, the central bank provided funds to financial institutions based on their performance in issuing loans that met pre-set criteria. However, this program will offer support according to overall SME lending performance without any predetermined requirements." The official added, "To maximize policy impact, incentives such as expanding limits and preferential loan rates will be granted based on each institution's performance evaluation. Furthermore, to promote competition among financial institutions, in addition to existing banks, internet-only banks may also be included in the participating organizations." Starting in the second half of this year, the Bank of Korea intends to establish an institutional foundation to reinforce the function of complementing interest rate policy through discussions with financial institutions, building IT systems, and updating operational procedures.

Support for regional SMEs will be strengthened. This is because these firms have relatively lower access to finance compared to the capital region and are more affected by changes in economic conditions. Beginning in the first half of next year, the limit for the 'Regional SME Support' program will be increased through adjustments among various programs. The Bank of Korea will continue the temporary support measure of 14 trillion won until the end of August next year, and use newly secured available limits to further raise the overall limit. A Bank of Korea official said, "We have also considered that, despite the expansion of regional economies, the limit has remained fixed at 5.9 trillion won since 2014." The allocation of program limits by region will be determined by comprehensively considering changes in financial and economic conditions.

The quasi-fiscal 'Trade Finance Support' and 'New Growth and Job Creation Support' programs, which have operated with fixed limits for a long time, will be gradually phased out or abolished starting next year. A Bank of Korea official noted, "These programs have restricted the flexible use of the FISL according to economic conditions, as they have been operated on a constant basis to support credit supply to those respective sectors." The official added, "We also considered the fact that similar support is already being provided by other policy financial institutions." However, in consideration of the impact on existing loans, the programs will be gradually reduced or adjusted by program, rather than being abolished all at once.

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