South Korea to Provide $3.6 Billion More Loans to Smaller Firms

By Bomi Lim

Oct. 1 (Bloomberg) -- South Korea plans to provide at least 4.3 trillion won ($3.6 billion) in extra loans to small and medium-sized companies struggling from higher costs and losses related to currency risks.

The extra loans will be provided through state-controlled banks including Korea Development Bank and Industrial Bank of Korea, the Financial Services Commission said today in an e- mailed statement. The government will also ask the central bank to raise the limit on total loans to commercial banks, the regulator said.

The measure comes as smaller companies are saddled with slower sales on weaker demand and higher costs from rising oil prices. South Korean firms, mostly small ones, are also estimated to have lost 1.7 trillion won on contracts designed to hedge currency risks as the Korean won slumped 29 percent against the dollar this year.

Small and medium-sized companies are ``expected to face deepening financial difficulties'' as banks slow loans amid a global credit crunch, the regulator said. Banks extended 2.6 trillion won of loans to these companies in August, about a third of 6.1 trillion won extended in July, according to the regulator.

Bank of Korea, which sets the limit on its loans to commercial banks every quarter, said on Sept. 25 it would leave the amount unchanged at 6.5 trillion won for the last quarter.

The government plans to help out firms that have incurred losses on so-called knock-in knock-out contracts bought through banks, by asking lenders to give extra loans or reschedule contract deadlines, the agency said. Nearly 80 percent of the existing contracts will expire by June 2009, it said.

Under the contracts, companies get a fixed exchange rate provided the dollar trades within a certain range against the won. The companies are required to pay twice or three times the dollar amount of the contract when the U.S. currency appreciates beyond the range.

The regulator said it would investigate whether banks sold the contracts without properly explaining the risks. The Fair Trade Commission in July cleared Kookmin Bank, South Korea's largest, and other lenders of allegations that they were engaged in unfair trading when selling the products.

To contact the reporter on this story: Bomi Lim in Seoul at blim30@bloomberg.net