Productive Finance

Background

Financial-sector funds tied to real estate grew from 111% of GDP at the end of 2015 to 4137 trillion won, or 162% of GDP, at the end of 2024. Over the preceding nine years 64% of household assets were concentrated in real estate, well above the OECD average of 52.9%, while the share of corporate funds raised through loans rose from 24.2% at the end of 2015 to 29.7% at the end of 2024. The ten financial holding companies, meanwhile, posted a record net profit of 26.7 trillion won in 2024, up 12.4% from the previous year.

In its December 2025 report 'Shifting Fund Flows to the Productive Sector and Growth Vitality,' the Bank of Korea analysed data for 43 countries from 1975 to 2024 and estimated that reducing household loans by 10 percentage points of GDP and shifting them to the corporate sector, with total private lending unchanged, could raise the long-term growth rate by about 0.2 percentage points. The growth effect was larger when lending was allocated to small and medium-sized enterprises or highly productive firms. At the end of 2024 South Korea's household debt stood at 90.1% of GDP, above the United States (69.2%), the United Kingdom (76.3%) and Japan (65.1%), and the household share of total lending averaged 46.6% in 2020-2024 against a 43-country average of 37.5%.

Course of the policy

At a press conference marking 30 days in office on 3 July 2025, President Lee Jae-myung said he would move market funds from unproductive into productive areas and restore a virtuous economic cycle. On 19 September 2025 the Financial Services Commission held a meeting on transforming the financial industry for the productive-finance transition, chaired by FSC chairman Lee Eok-won, and announced three transformations, in policy finance, the financial industry and capital markets, together with the National Growth Fund, rationalization of bank and insurance capital rules, and capital-market reform. The minimum risk weight for mortgage loans was raised from 15% to 20%, and the risk weight on banks' holdings of unlisted shares was cut in principle from 400% to 250% while 400% was kept for holdings of less than three years and for venture-capital investment; the regulatory changes were due to take effect in the first quarter of 2026.

At a joint government-national report on the National Growth Fund on 10 September 2025, the fund was expanded from a planned 100 trillion won to more than 150 trillion won, made up of a 75-trillion-won Advanced Strategic Industry Fund backed by government-guaranteed bonds and 75 trillion won from the private sector, pension funds, financial companies and the public over five years, and was presented as the flagship task of the financial transformation. The Advanced Strategic Industry Fund Act was promulgated on 9 September 2025, with the fund due to be launched in early December of that year. The fund supplies ten advanced strategic industries, including artificial intelligence, semiconductors, bio and vaccines, robotics, hydrogen, secondary batteries, displays, future vehicles and defence, and their value chains, through direct equity investment, indirect equity investment, infrastructure investment and lending, and ultra-low-interest loans in the 2% range at Treasury bond levels; the stated targets were 30 trillion won of supply in 2026 and a 500-trillion-won market in strategic industries by 2030.

Capital-market tasks included introducing business development companies and security token offerings and obliging large securities firms to supply risk capital, while in policy finance the direction set was to reduce public guarantees for real-estate finance and strengthen technology finance.

Results and further expansion

In a May 2026 review of the government's first year, the Financial Services Commission announced that the National Growth Fund had approved 11 projects worth 8.4 trillion won, 7 of them in the regions for 4.6 trillion won; that two rounds of capital-rule rationalization for banks and insurers had freed up 80.7 trillion won and 98.7 trillion won of lending capacity respectively, that financial institutions had agreed to supply about 1242 trillion won over the following five years (616 trillion won private and 626 trillion won policy), and that 92 trillion won had been disbursed in the first quarter of 2026. At a press briefing in May 2026 Chairman Lee Eok-won said he had chaired 51 meetings since taking office, including 20 on productive finance, and assessed that the term had become a proper noun in the market. In July 2026 the Commission said it would expand the National Growth Fund from 150 trillion won to 200 trillion won, widen its scope from 12 advanced industries to include aerospace and others, increase direct equity investment from 3 trillion won a year to more than 5 trillion won, and set up a Korea Strategic Technology Partners (KSTP) of up to 10 trillion won.

The Financial Services Commission presented productive, inclusive and trusted finance as the three transformations guiding financial reform from 2026, and held the third meeting of the financial-sector productive finance consultative body under Vice Chairman Kwon Dae-young in March 2026, regularly reviewing financial institutions' progress and difficulties.

Limits and criticism

As corporate lending expanded, the average delinquency rate on SME loans at the four largest banks reached 0.55% at the end of the second quarter of 2026, the highest since 0.59% in the first quarter of 2017, up from 0.50% a year earlier, and the delinquency rate on domestic banks' SME loans stood at 1.00% at the end of May, the highest in 11 years since 2015. Estimated losses at the four largest financial groups, treated as unrecoverable, approached 3 trillion won at 2.9911 trillion won. The Financial Supervisory Service also said that given rising corporate lending and interest rates, preparation was needed for the possibility that delinquency rates would climb further.

Large-firm lending at the four largest banks grew sharply in the first half of 2026 while the growth rate of SME lending stayed low, prompting criticism that lending was skewing towards large firms contrary to the purpose of productive finance. SME delinquency rates were four times those of large firms and the SME loan delinquency rate hit a nine-year high, adding to soundness pressures.

Despite the policy of separating real estate from finance, the delinquency rate on real-estate project financing rose in the first quarter of 2026 against the end of the previous year, and financial institutions' project-finance loan delinquency rate rose to its highest in about a decade. Because maturities are concentrated in 2026 in particular, some observers argued the crisis may have been deferred rather than resolved.

What the research leaves open

Research also supports the following points, which a future revision may add. Citi Research assesses that the National Growth Fund relies on policy financial institutions issuing bonds, with 1 trillion won included as subordinated reinforcement in the 2026 budget. On regional finance, the fund is to invest at least 40% of its total in the regions and policy financial institutions were to raise their regional supply target from 40% in 2025 to 45% by 2028, and the Commission reported 54.7% for the fund and 44.1% for policy financial institutions in 2026, above target. Finally, 'productive finance' is also used in the United Kingdom and the European Union for a distinct institutional-investment agenda, so the general English aliases of this Korea-specific entry risk drawing in a different debate.