Financial Authorities Tackle Household Debt Management... "Fixed-Rate Loan Ratio to Increase to 50%"

Financial Supervisory Service Issues Administrative Guidance to Banks and Others

[Asia Economy Reporter Kim Hyo-jin] Financial authorities have raised the target ratios for fixed interest rate and non-grace period installment repayment loans to improve the quality of household debt and enhance its stability. This move comes from concerns that household debt, which has surpassed 1,600 trillion won, could cause a deterioration in the overall soundness of the financial sector.

According to financial authorities and the financial sector on the 16th, the Financial Supervisory Service recently sent an administrative guidance letter raising banks' target ratio for fixed interest rate loans to 50% by the end of this year. Last year, the target was raised by 0.5 percentage points compared to the previous year, but this year it was increased by 2.0 percentage points.

As for the target ratio of non-grace period installment repayment loans, where principal and interest are repaid in installments immediately after loan execution, the target was frozen at 55% from the end of 2017 to the end of last year, but this year it was raised by 2.5 percentage points to 57.5%. The Financial Supervisory Service plans to implement this measure from early next month after collecting opinions by the end of this month, unless there are special circumstances.

The insurance sector's target ratio for fixed interest rate loans by the end of this year was also raised from the current 45% to 50%. The target ratio for non-grace period installment repayment loans will be increased from the current 60% to 62.5%, according to the Financial Supervisory Service's policy. The target ratio for non-grace period installment repayment loans in mutual finance will be adjusted upward from the existing 30% to 35% at the central association level. Although administrative guidance is not a binding measure with sanctions, most financial companies comply with it.

According to the Bank of Korea, the balance of household credit in South Korea exceeded 1,600 trillion won for the first time at the end of last year, reaching 1,600.1 trillion won. Household credit increased by 63.4 trillion won over the past year, a 4.1% increase compared to the previous year. Household credit refers to the total debt of households, combining household loans borrowed from banks and other financial institutions and sales credit generated by using credit cards and other means.

The household credit growth rate last year was the lowest in 16 years since 2003. However, the household debt growth rate in the fourth quarter of last year (4.1% year-on-year) rebounded from the third quarter (3.9%), ending a slowdown trend that had continued for 11 consecutive quarters.

In particular, household loans increased by 23 trillion won in the fourth quarter, exceeding the previous quarter's 13.4 trillion won and the fourth quarter of 2018's 19.4 trillion won. This was due to a significant increase in other loans, including mortgage loans and credit loans. The trend of household debt growth outpacing household income growth is also continuing.

A financial sector official said, "Due to adverse factors such as the novel coronavirus infection (COVID-19), financial market uncertainty is intensifying, highlighting the need for overall management."

This content was produced with the assistance of AI translation services.