Shifting Credit From Households to Firms Could Boost Korea's Growth by 0.2%p

Redirecting credit from households to the corporate sector could meaningfully lift Korea's long-term economic growth rate, a Bank of Korea study found, as concerns mount over weakening growth potential due to excessive credit concentration in non-productive sectors such as household and real estate lending.

A research team led by Hwang In-do, head of the Financial and Monetary Research Division at the BOK's Economic Research Institute, analyzed panel data from 43 countries spanning 1975 to 2024. The findings, published Wednesday in a BOK Issue Note titled "Shifting Fund Flows Toward Productive Sectors and Growth Vitality," showed that economies with a higher share of credit allocated to the corporate sector achieved significantly higher long-term growth rates, even when total private credit remained constant.

The report identified Korea's credit structure as problematic. Household credit stood at 90.1% of GDP at the end of 2024, exceeding levels in the United States (69.2%), the United Kingdom (76.3%), and Japan (65.1%), and far above the 43-country average of 49.6%. Corporate credit accounts for just 55.1% of total private credit, below the 43-country average of 62.4%. An estimated 49.7% of private credit, or 1,932 trillion won ($1.4 trillion), is tied up in real estate-related loans.

"The concentration of limited capital in non-productive sectors is constraining capital supply to productive sectors, exacerbating declines in total factor productivity and slowing potential growth," the researchers said.

The central bank quantified the potential impact of credit reallocation. Simulations showed that reducing household credit by 10 percentage points of GDP—from 90.1% to 80.1%—while redirecting it to the corporate sector would raise the long-term growth rate by approximately 0.2 percentage points annually, keeping total private credit unchanged. This means simply changing the direction of credit flows could lift next year's projected growth rate from 1.8% to 2.0%.

The channel through which expanded corporate credit boosts growth is improved labor productivity through higher investment rates. The BOK's analysis found that a 1 percentage point increase in the investment rate raises labor productivity by up to 0.77 percentage points. These effects are maximized when lending flows to industries with high capital productivity and those with many new venture companies.

The central bank emphasized that policy should encourage credit expansion in productive sectors. It recommended raising risk weights on mortgage loans to reduce real estate lending. Higher capital requirements for mortgage origination would naturally lead banks to curtail such lending.

The BOK also proposed introducing incentives for financial institutions to expand corporate lending. It called for shifting loan screening practices from balance sheet and collateral-based assessments to evaluations of technology and intangible assets, thereby increasing funding to innovative companies.