Financial Authorities Tackle Household Debt Management…"Banks to Raise Fixed-Rate Loan Share to 50%" (Comprehensive)

Financial Supervisory Service, Administrative Guidance for Banks
Increase in Proportion of Non-Administrative Installment Repayments

[Asia Economy Reporter Kim Hyo-jin] Financial authorities have raised the target ratios for fixed-rate and non-grace period installment 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 proportion of fixed-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 has been increased by 2.0 percentage points.

Regarding the target ratio for non-grace period installment loans, which require repayment of principal along with interest from the time the loan is disbursed, the target was frozen at 55% from the end of 2017 through last year, but this year it has been raised by 2.5 percentage points to 57.5%. The Financial Supervisory Service plans to implement this measure from early next month after completing a public consultation process by the end of this month, unless there are special circumstances.

The target ratio for fixed-rate loans in the insurance sector by the end of this year has also been raised from the current 45% to 50%. The target for non-grace period installment 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 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 with 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 lasted for 11 consecutive quarters.

In particular, household loans increased by 23 trillion won in the fourth quarter, exceeding not only the previous quarter’s 13.4 trillion won but also the 19.4 trillion won recorded in the fourth quarter of 2018. 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 disease (COVID-19), financial market uncertainty is intensifying, highlighting the need for overall management."

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