The government’s stance on "production-oriented finance" is showing subtle signs of wavering. As concerns over mortgage cliffs for actual homebuyers and shortages in housing supply have come to the fore, the government has now classified real estate project financing (PF) aimed at boosting housing supply as a "high-productivity activity," urging active funding support. This has left the banking sector, which had been adjusting its credit portfolios to align with directives to shift funds from real estate into advanced industries and other sectors, feeling confused and perplexed.
According to financial industry sources on the 1st, the Financial Services Commission stated through the the 13th measures that it would actively encourage support for PF funding for housing supply, classifying it as a high-productivity activity consistent with the government’s "production-oriented finance" policy.
Confusion has arisen within the banking sector. The core of production-oriented finance is to shift funds concentrated in household loans, real estate, and rental businesses toward advanced industries and innovative companies. However, the government has now reclassified housing supply PF as high-productivity finance. Banks have previously adjusted their credit portfolios by reducing exposure to real estate and rental business loans while expanding corporate financing in line with the government’s policy direction.
The Financial Services Commission reportedly held a "regular meeting kickoff" for the financial and construction sectors on the 28th of last month, inviting representatives from five major banks and construction firms. The meeting encouraged swift credit approval and disbursement for existing PF projects and requested ideas to increase PF funding. It also urged rapid approval of funds for PF syndicated loans established by the banking and insurance sectors in 2024. Originally sized at 1 trillion won, this syndicated loan received only six approvals (732.6 billion won) over two years. However, under the the 13th measures, the government announced plans to expand it to a scale of 5 trillion won.
Nevertheless, despite the government’s demands, the banking sector is expected to face limits in accelerating PF fund disbursement. Even if departments responsible for real estate finance rush to execute loans for existing projects, approval and risk management departments with decision-making authority reportedly maintain conservative stances citing potential defaults. There are also concerns that rapid execution will be difficult since PF syndicated loans require unanimous approval from all five major banks before funds can be disbursed.
A bank official stated, "Projects with clear profitability and strong sales prospects often already have financial institutions involved." They added, "For projects currently experiencing delays in funding, there are usually valid reasons. Therefore, credit review and risk management departments inevitably worry about what would happen if defaults occur."
Financial authorities are reportedly considering exemption measures to reduce liability for bank employees even if defaults occur during active fund disbursement. However, the burden remains significant because disciplinary actions and losses from loan defaults remain separate issues.
The official explained, "If a project becomes distressed and generates losses, the bank ultimately bears them." They added, "When PF projects worth hundreds of billions to trillions of won become distressed, they directly impact provisions, delinquency rates, and capital adequacy ratios, leaving credit review and risk management departments with no choice but to proceed cautiously."
Banks also find it difficult to immediately increase lending for PF or real estate/rental businesses in response to government directives. Banks pre-set and manage industry-specific credit exposure limits at the beginning of each year. For example, if a bank commits to increasing rental business loans by only 10% annually, it will halt new approvals once that limit is reached mid-year. It has been understood that major banks have not separately revised their internal classification criteria for "production-oriented finance" even after the the 13th measures.
Critics also point out inherent limitations in attributing housing supply shortages solely to financial factors. The root causes of insufficient housing supply in key Seoul metropolitan area regions are attributed more to a lack of new land development, delays in reconstruction and redevelopment permits, and project viability than to PF funding shortages. A bank official remarked, "Finance cannot precede physical reality." They added, "It is not the case that apartment supply is stalled because financial institutional investors refuse to provide PF."
Conversely, some argue that the government’s policy direction is not necessarily contradictory. Loans generated during the buying and selling of existing homes differ economically from construction and PF financing that actually creates new housing. The logic holds that new housing PF can be considered productive finance because it triggers land acquisition, construction, job creation, and ultimately increases housing supply.
A bank official stated, "What the government is saying can be interpreted as continuing to manage loans for transactions of existing homes while fully supplying financing needed to provide newly constructed housing." They added, "However, since increased new construction inevitably leads to higher demand for interim and final payment loans, pressure on household loan growth is unavoidable."
Within the banking sector, voices are calling for clearer coordination if the government aims to simultaneously pursue its medium-to-long-term policy goal of production-oriented finance and address the immediate short-term issue of expanding housing supply. Critics argue that clearly defining the boundary between housing supply financing and production-oriented finance, along with presenting specific recognition criteria, is necessary for government directives to translate into actual adjustments in banks’ credit strategies and fund disbursement.
in FINANCE
