Bank of Korea Boosts Funds for Small Business Loans

Oct. 23 -- The Bank of Korea will make more money available for banks to lend at discount rates to small businesses, widening efforts to add liquidity to the financial system and shore up the economy as shares and the currency slump.

The limit on so-called total loans will be raised to 9 trillion won ($6.36 billion) from 6.5 trillion won, the first increase in seven years, the Bank of Korea said in Seoul today. The money is lent to banks at an interest rate of 3.25 percent -- lower than the benchmark policy rate of 5 percent -- for them to pass on in cheap loans to smaller companies.

President Lee Myung Bak said this week the global financial meltdown is more severe than the currency crisis that swept the region a decade ago. The government has pledged $130 billion to support lenders as the credit crunch saps banks' access to foreign funds, and said it will spend as much as 8 trillion won to rescue builders struggling with unsold apartments.

``Financial conditions for small- and medium-sized companies are worsening,'' said Jang Byung Wha, director general of the central bank's monetary policy department. ``Such conditions will continue for a significant period of time given the possibility of prolonged financial-market instability and the outlook for an economic slowdown.''

South Korea's won fell 4 percent to 1,420.97 per dollar at 9:47 a.m. in Seoul. The Kospi index tumbled 8.3 percent to 1,040.02, the third straight decline.

Markets Tumble

The won dropped 35 percent this year, Asia's worst performing currency, and the stock index slumped to a three-year low as investors pull out of emerging markets on growing concern the global economy will fall into a recession.

Signs the economy is faltering in its 10th year of expansion have stoked speculation the central bank will cut borrowing costs further. The Bank of Korea lowered the benchmark rate to 5 percent on Oct. 9, the first reduction in four years.

Gross domestic product probably grew at the weakest pace in four years in the third quarter, expanding 0.6 percent from the previous three months and 3.7 percent from a year earlier, according to a Bloomberg survey of economists. The report is due to be released tomorrow.

Posco, Asia's biggest maker of stainless steel, said yesterday it will slash planned output by about a third this quarter and rival South Korean steelmakers may also cut production to cope with moderating demand.

Korean manufacturers, builders and retailers are cutting workers, and consumer confidence has tumbled.

It was the first time since October 2001 the central bank has expanded the funds available for total loans, with the cap typically set each quarter. In September, the bank had said the limit would be unchanged for the fourth quarter of 2008.

By William Sim