S. Korea to provide liquidity to smaller firms

SEOUL, Oct. 1 (Yonhap) -- South Korea's financial watchdog said Wednesday the
government will extend liquidity of about 4.3 trillion won (US$3.56 billion) to
smaller firms in a bid to help them ease cash shortages.

"The government plans to provide liquidity to smaller companies by expanding
state-owned lenders' funds or the central bank's loans to commercial banks, and
will increase credit guarantees by 4 trillion won," the Financial Services
Commission (FSC) said in a statement after meeting with party policymakers. The
move is designed to facilitate local banks' roles in providing funds to smaller
companies by giving incentives to commercial lenders.
According to the plan, banks would put smaller companies into four categories
according to their financial soundness under the watchdog's guidelines, and
liquidity would be provided only to the upper two groups, one of which suffers
from temporary cash shortages. The program will be implemented until June 2009,
the FSC said.
The move came as South Korean small- and medium-sized enterprises (SMEs) have
felt more pinched amid sluggish domestic demand and global financial turmoil.
According to the Bank of Korea, the growth of South Korean bank loans to
companies slowed sharply in August as lenders, looking to strengthen their risk
management, tightened their grip on lending to smaller firms.
Meanwhile, the FSC said that starting in October, it will implement measures to
support small companies suffering from losses related currency option contracts
called "knock-in knock-out (KIKO)" options.
KIKO enables companies to sell dollars with a fixed won-dollar rate if the won
moves within a certain range set by the contract. But if the won's value falls
below the band, firms are forced to sell the dollar far below the market
won-dollar rate, incurring heavy losses.
Last year, many SMEs took the currency options as a way to hedge currency risks,
with expectations that the won's value would not drop sharply.
In 2007, the won rose an average 2.8 percent against the greenback from a year
ago, but the won's steep falls this year are taking a toll on such companies. The
local currency tumbled to a 64-month low against the greenback on Tuesday, with
its value losing more than 22 percent so far this year.
According to the watchdog, if KIKO-battered SMEs apply for help, local banks
would provide funds like extending lending or rolling over a maturity after
checking whether they have the capacity to bounce back from losses.