Structural Changes in Structural Changes in Trade Credit Markets in KoreaTrade Credit Markets in Korea

2003. 11. 10

Joon-Kyung Kim, KDIJoon-Kyung Kim, KDI

Declining trend of total commercial bills issued following the crisis Declining trend of total commercial bills issued following the crisis

.

<Bills Receivable and Discounted> (unit: billion won, %)

Bills Receivables

(A)

Bills Discounted

(B)

Total Bills Issued

(A+B)

Proportion of Bills Discounted

B/(A+B)

1985 5,409.5 4,192.0 9,601.5 43.71986 5,807.8 4,335.0 10,142.8 42.71987 7,150.6 5,893.0 13,043.6 45.21988 7,869.1 7,551.0 15,420.1 49.01989 10,538.1 9,234.0 19,772.1 46.71990 15,852.2 11,859.0 27,711.2 42.81991 19,438.2 16,257.0 35,695.2 45.51992 20,806.4 19,859.0 40,665.4 48.81993 23,600.3 24,699.0 48,299.3 51.11994 29,364.9 34,290.0 63,654.9 53.91995 32,212.4 38,826.0 71,038.4 54.71996 31,914.4 52,746.0 84,660.4 62.31997 49,785.0 46,835.6 96,620.6 48.51998 43,655.7 26,876.6 70,532.3 38.11999 42,794.1 35,811.3 78,605.4 45.62000 41,397.6 35,643.5 77,041.1 46.32001 39,480.0 24,299.1 63,779.1 38.12002 44,938.2 21,589.3 66,527.5 32.5

Following the crisis, small and medium-sized companies have received more cash for goods sold Following the crisis, small and medium-sized companies have received more cash for goods sold

< Payment for SMC’s Goods Sold by Method >

(unit: %)cash bills receivable other receivable total

1988 43.6 45.6 10.8 1001992 34.0 59.2 6.8 1001993 29.4 56.2 14.4 1001994 28.2 56.6 15.2 1001995 30.3 57.5 12.2 1001996 29.4 55.7 14.9 1001997 28.2 59.5 12.3 1001998 32.0 53.6 14.4 1001999 34.4 49.8 15.8 1002000 38.9 43.1 18.0 1002001 58.0 42.0 - 1002002 60.1 39.9 - 100

The sharp decrease in fixed investment after the crisis led to the decrease in bills issued The sharp decrease in fixed investment after the crisis led to the decrease in bills issued

< The Relationship between Trade Credit and Fixed Investment >

26%

28%

30%

32%

34%

36%

38%

40%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 200210%

12%

14%

16%

18%

20%

22%

24%

TRADE CREDIT/GDP(RIGHT)

FIXED INVESTMENT/GDP(LEFT)

Mitigation of shortage of funds in corporate sector following the crisis led to the decrease in bills issued Mitigation of shortage of funds in corporate sector following the crisis led to the decrease in bills issued

< The Relationship between Trade Credit and

the Extent of Shortage of Funds in Corporate Sector >

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 20026%

8%

10%

12%

14%

16%

18%

20%

22%

24%

TRADE CREDIT/GDP(RIGHT)

(FUND RAISING- FUND UTILIZATION)/GDP(LIFT)

Advantages of suppliers over financial institutions Advantages of suppliers over financial institutions

1. Advantage in information acquisition

- Through the normal course of business, suppliers can get the buyer’s information at lower cost

2. Advantage in salvaging value from existing assets

- If the buyer defaults, both the banks and the supplier can seize the goods supplied.

- If the supplier already has a network for selling its

goods, its

costs of resale will be lower than that of banks.

Different treatment of suppliers between formal insolvency procedure and informal workout Different treatment of suppliers between formal insolvency procedure and informal workout

- Supplier is usually just one of non-secured creditor, so he/she would be better off if the ailing buyer enters into the workout program compared with the in-court Corporate Reorganization procedure.

* Under the Corporate Reorganization procedure, all the buyer’s debts, including bills payable, are frozen.

* There does not exist a clear rule in treatment of suppler and non-secured creditor institutions.