Banks Signing Memorandum for '2 Trillion Won Monthly' Personal Loans... Could Cut Off Funds for Ordinary People (Comprehensive)

Monthly Increase Rate Maintenance Plan Submitted to Authorities
Loan Limits Reduced and Interest Rates Raised, Making 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. In response to 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 will implement targeted regulations on high-credit and high-income borrowers by lowering 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 the monthly increase in credit loans at around 2 trillion won until the end of this year.

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

According to Park’s data, the balance of credit loans 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 in the banking sector. 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.” Consequently, 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, focusing on their main 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 to within 150% of annual income for high-credit borrowers rated 1 to 2, 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 for financial authorities to request 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 being a targeted regulation on high-income borrowers.

This trend of loan restraint was also reflected in the results of the Bank of Korea’s recent ‘2020 Q3 Loan Behavior 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 will conduct stricter loan screenings in the fourth quarter of this year. A banking sector official said, “While it is necessary to slow down credit loans, if the total loan volume decreases while COVID-19 has not ended, the 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 possibility of delinquency.” Another official said, “Managing the total volume of credit loans aims to reduce limits for high-credit borrowers and raise interest rates to curb investment-purpose loans,” but also noted, “Since the overall volume will decrease, loan screening processes are expected to become more stringent.”

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