Loan business

Loan business (대출업무) is one of the four pillars of banking business by which banks grant credit and make profit. The other three pillars are deposit taking, domestic/foreign exchange, incidental and ancillary businesses including securities business.

Commercial banks extend corporate loans, private loans, public loans and other forms of loans which are categorized into short-term working funds and long-term facilities funds.

Key words
loan business, bill discounting, overdraft, secured receivables

Types of Loans
Loans from commercial banks are divided into bill discounts, loans on bills, loans on documents and overdrafts, depending upon the method of operation.


 * Bill discounting allows a financial institution to supply a borrower with funds by purchasing bills acquired by the borrower following deduction of the interest created from the date of bill discounting until the date of maturity.
 * A loan on bills allows the borrower to be provided with capital by designating the bank as the recipient of issued promissory notes. These are generally used for the lending of short-term working funds to enterprises.
 * A loan on documents allows the bank to demand a bond of debt rather than a bill from the borrower. These are frequently used for loans attached to special contracts, private loans that do not allow refinancing prior to the point of repayment, and long-term facilities funds.
 * An overdraft allows a bank to offer payment service on checks issued in excess of the balance of a checking account in the form of an automatic loan, within the limits on loans on overdrawn accounts agreed upon in the contract between the holder of the checking account and the bank.

The most commonly issued type of loans extended by banks is loans on bills, which entail more benefits than do loans on documents, since it is possible to acquire bills protected by civil law related to loans for consumption contracts as well as by the Bills of Exchange and Promissory Notes Act.

Loans on bills are also preferred due to the ability of banks to receive loans from the Bank of Korea (BOK) with such bills as collateral securities.

Classification of Loans
Loans include commercial bills discounted, foreign trade loans, general loans and housing related loans. As of the end of 2010, 84.6 percent of loans made in Korean won were current fund loans, 6.7 percent housing loans and 2.1 percent Secured Receivables Loans. Nationwide and local banks show similar patterns of lending, while current fund loans comprise the bulk of loans operated by the Korean branches of foreign banks.

In the meantime, by borrower, household loans (49.6%) and corporate loans (50.2%) account for similar proportions. This is because enterprises have reduced their bank lending as part of the movement to enhance their financial soundness by reducing their debt ratios since the 1997 Asian currency crisis. Banks have also grown more sensitive to credit risks, expanding their holdings of relatively stable household loans while reducing their riskier business loans.

With the exception of those on fiscal funds, all interest rates have been liberalized since July 1994. Most commercial banks had in the past used loan interest rates linked to market interest rates, but since February 2010 the cost of funds index (COFIX) has been used, especially for household loans.

A loan interest rate linked to a market interest rate is decided, based upon addition of cost, a proper margin and market interest rates such as CD and Treasury bond interest rates. The Korea Federation of Banks calculates the COFIX by the average cost of funds of time and savings deposits, CDs, RPs, cover bills and financial bonds of the nine domestic banks, and discloses it on the 15th of every month (based upon newly extended loans, and balance outstanding.)

For the sake of equitable distribution of financial capital, commercial banks are obliged to lend to small and medium-sized enterprises a certain ratio of the increases in their banking loan funds. The ratio is announced by the BOK’s Monetary Policy Committee, and as of end-June 2011 was 45 percent or higher in the case of nationwide banks, 60 percent or higher in the case of local banks, and 35 percent or higher in the case of the Korean branches of foreign bank.

Commercial Bill Discounting
Commercial bill discounting is a representative type of lending, along with loans on overdrawn accounts, which provides enterprises with short-term working funds. It allows a financial institution to discount and purchase issued bills related to commercial transactions prior to the date of maturity, and make payments to recipients who request bill discounting.

Commercial bill discounting is a traditional form of commercial financing as a short-term loan with automatic repayment. Commercial bill discounting can be performed on all bills issued, transferred or accepted through the process of commercial transactions. Meanwhile, banks are allowed the rediscounting of bills purchased on discount from the BOK. A screening system for appropriate business regarding loans from the BOK was formerly in place, but was abolished once aggregate credit controls took effect.

Foreign Trade Loans
Foreign trade loans are loans to supply export-related businesses and providers of raw materials or finished goods for export with the funds needed to carry out their businesses.

Foreign trade loans are executed for those who request loans, including enterprises intending to export or to domestically provide goods or construction services, based on export L/Cs (letters of credit), documents against payment (D/Ps), documents against acceptance (D/As), or other export-related contracts; for those intending to provide raw materials or finished goods for export based on domestic L/Cs; and for those who have exported or provided those services in these manners based on export performance. Companies belonging to the top 30 affiliated conglomerates are not allowed to seek such trade financing.

With regard to their use, banks provide separate financing in accordance with the use, such as for production, provision of raw materials, or purchase of finished goods, and also provide comprehensive financing to businesses with less than 50 million U.S. dollars of export revenue in the prior year or in the twelve months prior to that date.

Overdrafts
Overdrafts are loans which allow a bank to make payment on issued checks or bills that exceed the balance of a checking account within limits agreed upon in the contract between the bank and the holder of that account. The borrower makes repayment by depositing funds in the checking account at any time within the agreed upon loan period. Overdrafts, the simplest and most immediate type of bank loan, are a highly convenient system for enterprises which require frequent deposits and withdrawals of funds. However, they may entail risks for the bank stemming from unpredictability in the amounts and times of the loans, and so banks provide overdrafts only to those enterprises having close business relationships with them and favorable credit statuses.

General Loans
General loans include all loans with no set limits on their use and no designated loan forms. The periods of such loans are generally less than one year in the case of business working funds and private funds and three to seven years in the case of business facilities funds. A grace period for repayment can be determined in cases where profit is created only after a period of time. Facilities fund loans whose periods exceed three years should be repaid in monthly installments over a less-than-one-year period in order to prevent the freezing of capital.

Business working fund loans can also be made in the form of revolving facilities of current funds in a limited transaction system. This allows revolving facilities of short-term business working fund loans for a period of less than one year, below a pre-determined credit ceiling for businesses with favorable credit status.

Loans Related with Installment Savings
The purpose of loans tied to installment savings is to provide convenient financial accommodation to holders of installment savings. This includes loans on installment savings and loans on the collateral of installment savings.

The borrower and the method of the loan are decided autonomously by the individual bank. A loan on installment savings allows lending within the range of an agreed amount of installment savings after monthly installments have been completed for a determined period of time (approximately one quarter of the total period). A loan on the collateral of installment savings allows loan extension within the range of the installments that have been paid.

Loans for Corporate Purchases
Loans for corporate purchases were introduced in May 2001, in order to address the side effects of the use of commercial bills and to promote cash payments in business transactions. Through this type of loan, upon completion of the goods provision a supplier issues a bill of exchange, designating the buyer as the payer and the payment made for the goods as the amount payable. After the supplier requests that the bank collect the payment, the buyer takes out a business purchase loan within the limit set by the loan provider at the time of payment and settlement of the bill of exchange.

The period of a loan for corporate purchases is autonomously decided on by the provider in consideration of the financial conditions of the buyer and the actual loan period required. The amount of the loan is pre-determined within the limits of the purchase amount (the amount of the bill of exchange issued by the provider). Loans for corporate purchases are executed only for corporations with business licenses. Companies subsidiary to the top 30 affiliated conglomerates are not allowed to receive business purchase loans.

Foreign Currency Loans
The foreign currency loan system was started after enactment of the Regulation on Foreign Currency Loans in November 1952, to support the introduction of raw materials and installation property. Currently, the system is based on the Sub-regulation on Foreign Exchange Transactions. In the past, borrowing of foreign currency loans was limited to loans for the management of external debt, currency and foreign exchange, but this was liberalized in October 2001. However, the scope of borrowers was limited again in August 2007 and January 2008 ― to overseas end-users and domestic facility funds, repectively ― due to the soaring of external debts from foreign currency loans extended for the purpose of raising won funds, and the increasing pressures for won appreciation.

The limit was after that eased in some part, but since July 2010 foreign currency loans have been limited to those for overseas use only. The loan ceiling is decided within the amount required, and the loan period is set by the FX bank, in consideration of the use of the funds and the financial conditions of the requesting party. Interest rates are autonomously decided on by FX banks in consideration of major international rates and the cost of the FX loan business. In general, they are decided based on LIBOR with some premiums, taking into account the funding costs of the financial institutions and the credit ratings of the borrowers.