Banks Signing '2 Trillion Won Personal Loan' Memorandum... Harder Times for Ordinary People

Monthly Increase Plan Submitted to Authorities... Reduced Limits and Rising Interest Rates Make Living Expense Loans More Difficult

[Asia Economy Reporter Kim Min-young] Financial authorities have received a ‘memorandum’ from banks pledging to keep household credit loans at around 2 trillion won per month. Amid soaring jeonse prices and the frenzy of debt-financed investment (debt investment) and all-in borrowing (loans gathered to the last penny), banks, instructed to tighten credit loans, have collectively proposed voluntary regulatory measures. While banks claim they are targeting high-credit and high-income borrowers through measures such as lowering loan limits and reducing preferential interest rates, concerns are rising that the increased loan thresholds will also impact ordinary citizens seeking funds for living expenses.

According to data obtained by Park Yong-jin, a member of the National Assembly’s Political Affairs Committee from the Democratic Party of Korea, from the Financial Supervisory Service on the 14th, 18 domestic banks, including major commercial banks and internet-only banks, have submitted plans to maintain monthly credit loan growth at the 2 trillion won level through the end of this year.

These banks reportedly submitted detailed data on credit loan balances and growth rate management targets for last year and this year to the Financial Supervisory Service, setting the target increase for October to December firmly at the ‘2 trillion won level.’

According to Park’s data, the total credit loan balance handled by banks from January to last month reached 21.3 trillion won, with monthly increases steadily rising: 1.2 trillion won in May, 3.3 trillion won in June, 3.4 trillion won in July, and 5.3 trillion won in August.

In response, financial authorities expressed concern over the surge in credit loans by banks. Son Byung-doo, Vice Chairman of the Financial Services Commission, warned at the Financial Risk Response Team meeting on the 8th of last month, “We will investigate whether the recent increase in credit loans is due to competition among banks for loan performance.” Subsequently, the increase in credit loans last month dropped to 2.9 trillion won, about half of August’s level.

However, banks cannot arbitrarily reject credit loan applications from customers with good credit or professionals. Banks have introduced measures such as reducing loan limits and preferential interest rates, mainly targeting their key credit loan products. These include plans to reduce the maximum loan limit per product from the previous 200 million to 400 million won to 150 million to 200 million won, and tightening the loan limit for high-credit borrowers with credit ratings of 1 to 2 to within 150% of annual income, down from 200%. Preferential interest rates will also be reduced by about 0.1 to 0.4 percentage points depending on the bank. A bank official said, “It is very unusual that financial authorities asked us to submit monthly credit loan increase plans,” adding, “We lowered the credit loan limit for high-income professionals from 250 million won to 200 million won, and the adjustment of preferential interest rates is scheduled to be implemented around next week.”

The problem is that as banks raise interest rates on credit loans for salaried workers overall, the reduction in limits and increase in rates may affect ordinary citizens seeking funds for living expenses rather than just targeting high-income borrowers.

This trend of loan restraint was also reflected in the results of the Bank of Korea’s recent ‘2020 Q3 Loan Attitude Survey.’

The survey found that attitudes toward loans for household housing (-6) and general household credit loans (-9) were particularly conservative. A negative index indicates that banks plan to conduct stricter loan screenings in the fourth quarter of this year. A banking industry official commented, “While it is necessary to slow down credit loan growth, if the total loan volume decreases while the COVID-19 pandemic has not ended, the loan limits for ordinary citizens using credit loans to cover living expenses may be reduced or loan extensions may be denied,” adding, “If these borrowers move to secondary financial institutions, the effective interest rates could rise significantly, or there is a risk of delinquency.”

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