Financial regulator to tone down punishment to encourage riskier investment

South Korea's top financial regulator said Tuesday it will pull back almost entirely from punishing individuals at financial institutions for missteps, in a move to encourage them to make riskier but potentially lucrative loans to start-ups.

The Financial Services Commission said it will cut down on punitive measures against individuals by as much as 90 percent and instead leave disciplinary decisions to companies. It said it will continue to monitor and reprimand institutions for wrongdoing.

"Except for severe breaches, we will end the practice of financial authorities reprimanding individuals, and leave the matter to their companies," the FSC said.

The aim is to encourage banks and other financial institutions to increase loans to start-up ventures, boosting the economy.

"Officials will be exempted from penalties for loans that turn sour due to changes in circumstances a few years later," the regulator said.

The FSC plans to strengthen the financial industry's role in providing money to help start-ups get the capital they need to create and expand their businesses.

"We need to open the 'sluice gate' to make money flow abundantly to the creative financial market that is thirsty for capital," the FSC said.

According to data, bank loans to mid- and small-sized companies have been on a steady decline since 2009 when they accounted for 83.1 percent, or 443.5 trillion won ($434.4 billion), of 533.7 trillion won in total corporate loans. As of June this year, the figure fell to 73.3 percent, or 508.6 trillion won, of 693.7 trillion won.

The FSC said technology credit bureaus will assess credit risks of technologies and ideas that haven't yet been invested in and store the data on the technology data base.

Local banks that extend loans to technology start-ups with high-growth potential will get incentives including having the government cover up to three percentage points of their loan interest rate.

The tech-loan fund operated by the state-run Korea Development Bank and the Industrial Bank of Korea will be expanded to 1 trillion won to support local lenders with the state banks sharing the risks, the FSC said.

The plan is aimed at making the financial industry more friendly to technology start-ups, it added.

"There is a big gap between the expectations of financial actors and the situation in the real economy," said the regulator.

"We will push forward the plan to help the people feel the change as soon as possible."

The FSC's moves follow a major flap last week when the watchdog Financial Supervisory Service, after deliberating for two months on its punishment of finance chiefs, announced sanctions that were much lighter than had been indicated.

Some 90 officials of banking giant KB Financial Group and its flagship Kookmin Bank, including KB Chairman Lim Young-rok and bank president Lee Kun-ho, were disciplined for management failures and illegal loans. But the punishment ended at "advisory warnings" instead of sanctions that the FSC earlier said could force the two CEOs to step down.

The watchdog was immediately hit with criticism that after causing confusion and serious delays in key managerial decisions, the end results fell way short of expectations.

"Financial businesses have been afraid of FSS punishment and tried to avoid responsibility. Such practices have hampered financial reforms and the creation of an innovative culture," the FSC said.

Earlier this month, FSC Chairman Shin Je-yoon said he would consider punishing only financial companies and not individuals for decisions taken on loans. (Yonhap)