Before 1997 financial crisis, dominant financing method of firms was based on government intervention. The crisis, however, changed the method to market-oriented system. After the crisis, the ratio of external fund in a firm's total fund has steadily declined. Direct financing through the market including issuing corporate bonds and paid-in capital increase has increased. In particular, the ratio of corporate bonds is extremely high. The ratio of corporate loan in the total loan of banks tends to decrease, while that of mortgage loan is increasing. Especially relationship banking has weakened. As to maturity of loan, the ratio of short-term loan is increasing.
The biggest influence for those changes is restructuring driven by the Korean government and auditing authority. Firms made an effort to reduce debt ratio in order to survive in the restructuring. Financial institutions also attempted to increase BIS ratio in order to hold a dominant position, which resulted in conservative lending attitude. Capital market openness is another factor to have affected the Korean financial industry. Foreign capital has a tendency to prefer stable mortgage loan and short-term profitable items. The influence made the role of banks as an intermediary more weak.
Corporate loan plays an important role as continuous source of fund even when the function of financial market does not work well and overall firm credit worsens due to recession. Therefore, it can contribute to normalization of capital market. Shrinking corporate loan might hamper growth of firms in innovation and potential energy, leading to hindering economic growth.
As to direct financing of Korean firms, the stock market and corporate bond market have failed to function as a stable source of financing as collapse of KOSDAQ market and the paralysis of corporate bonds with the dishonor of Daewoo corporation in 1999 show. Therefore, it seems necessary to develop market infrastructure that developed countries with market-oriented financial system possess in order to develop our financial system toward market-oriented one in the long run.