Insights

Korea is trying to move capital out of property and household lending and into strategic industries. Issue Monitor No. 187 from the Samjong KPMG Economic Research Institute reviews the government's "productive finance" agenda and the issues it raises. Real-estate-related financial exposure stood at KRW 4,223trn at end-2025, equivalent to 1.6x nominal GDP. The policy push is also a response to slowing growth: the OECD expects Korea's potential growth rate to fall from 1.66% in 2026 to 1.52% in 2027 as an ageing population limits labour input. Against this backdrop, Korean financial institutions have pledged to supply KRW 1,560trn of productive finance over the next five years, split between KRW 628trn from private lenders and KRW 932trn from policy finance institutions.

Policy and the financial sector are moving in parallel. In September 2025 the Financial Services Commission set out nine tasks under three pillars: policy finance, the financial industry and capital markets. The National Growth Fund, the centrepiece of the programme, approved KRW 18.9trn between January and September 2026 against a target of KRW 30trn, with 44.7% directed outside the capital region. Across the sector, KRW 272.3trn had been supplied by end-July 2026. Major financial holding companies are building dedicated units and attaching KPIs to productive lending; KB Financial and NH Financial have each announced five-year programmes of KRW 93trn, and Hana Financial KRW 84trn. On the capital-markets side, the agenda includes a framework for security token offerings (STOs) and the introduction of business development companies (BDCs) to widen funding options for companies at different growth stages. Regulators are lowering bank risk weights, requiring large securities firms designated as comprehensive investment banks to supply venture capital, and granting liability exemptions to institutions that invest alongside the National Growth Fund.

Crowding out and inflated valuations are the main risks. The report groups the open issues into capital allocation, policy design and risk-bearing by financial institutions. Concentrating policy money in a few strategic sectors could crowd out private investment, encourage duplicate investment within the same industry and push valuations above fundamentals. There is still no common definition of what counts as productive finance or how to measure its results. Lending to innovative companies with limited collateral could also weigh on the capital ratios of the institutions involved. A further obstacle sits inside the institutions themselves: as long as staff are held personally responsible for losses, they will tend to favour secured lending, which is why the liability exemptions approved in March 2026 matter.

Overseas cases point to private risk-taking. Drawing on Japan, the US and the UK, the report argues that success depends less on the volume of policy funding than on whether private long-term capital is able to assess and carry the risk of innovative companies itself. The stated goal for Korea is a self-sustaining cycle in which capital assesses long-term risk, identifies promising companies, supports their growth and recycles exit proceeds into the next generation of firms.

M&A Implications. Productive finance is likely to reshape capital flows in the Korean deal market. First, the National Growth Fund, venture capital from large securities firms and equity investment by financial groups could act as a catalyst for growth-capital and pre-IPO rounds in AI, semiconductors and secondary batteries. Second, sectors that attract concentrated policy money tend to carry valuation premia, so buyers would need valuation and due diligence that strip out the policy tailwind and focus on underlying cash flows. Third, the target to raise the share of funding outside Seoul could create transactions that pair growth financing with succession planning at regional mid-sized companies. Fourth, marginal companies whose restructuring has been delayed, and non-strategic business lines, are likely candidates for divestitures and restructuring deals.