"No Income, No Loan?" Outrage Erupts Over Ultra-Strict Regulations

DSR Management Method Switching to Individual Basis... Concerns Over Balloon Effect of Non-Bank Financial Sector Defaults

[Asia Economy Reporter Jo Gang-wook] "Does this mean no loans if you have no income? If you earn good money, why would you need to get a bank loan?"

"People without money ultimately have no choice but to turn to private loans in emergencies. This policy is pushing the poor into private loans to try to control housing prices."

As next year's financial authorities' ultra-strong loan regulations are announced, dissatisfaction is pouring into the market. This is because the management method of the total debt service ratio (DSR) by financial institutions will be switched to an individual basis. This means managing household debt by lending based on the borrower's ability to repay. Accordingly, it is expected to become more difficult to get loans from banks, raising concerns that this could lead to a balloon effect, fueling insolvency in the secondary financial sector.

According to the Financial Services Commission and financial circles on the 18th, the FSC announced in the '2021 Economic Policy Direction Departmental Key Tasks' released the previous day that it will prepare an 'Advanced Household Debt Management Plan' centered on strengthening DSR in the first quarter of next year. The core is to switch the DSR management entity from the current financial institution basis to the borrower unit and to gradually replace the total debt-to-income ratio (DTI) with DSR when assessing the repayment ability for mortgage loans. DSR is a stronger loan regulation than DTI, representing the ratio of the borrower's annual income to the principal and interest repayment of all household loans. The total loan amount, including mortgage loans, credit loans (overdraft accounts), and car installments, is determined according to income.

When DSR is applied, methods such as taking additional credit loans instead of mortgage loans will not work. This is because all types of loans are summed up to limit the loan amount relative to income. If there are many other loans like credit loans, the mortgage loan is restricted accordingly.

The reason financial authorities are recently imposing comprehensive bank loan regulations following credit loan restrictions is due to concerns over insolvency caused by the record-high surge in household debt. According to the Bank of Korea, as of the end of the third quarter, the household credit balance was 1,682.1 trillion won, the highest since statistics began in the fourth quarter of 2002. Other loans including credit loans surged by 22.1 trillion won, the largest increase ever.

However, voices condemning this measure are growing on internet portal site bulletin boards such as Naver. A member of a financial community criticized, "If your income is low, does that mean you should forget about buying a house and just rent?" and added, "The country is in this state, yet they are forcing people to have children by saying they will provide money while complaining about low birth rates." Another member said, "It means only the wealthy can borrow more," and "The wealth gap will worsen, and only private lenders will be happy."

Concerns are also emerging within government departments about the successive strengthening of loan regulations by financial authorities. According to the minutes of the Monetary Policy Committee released by the Bank of Korea on the 15th, there was a point raised that the government's loan regulation strengthening could lead to a balloon effect in the non-bank sector. This is because the government's household loan management plan applies only to banks, raising concerns that loan demand may shift to non-bank sectors.

Commercial banks are suffering silently. They are under pressure not only from financial authorities but also from political circles, which seem to blame banks' indiscriminate loan approvals for the increase in household loans. There are also criticisms that the recent surge in voice phishing crimes using emergency loans as bait is a side effect of tightening regulations on banks.

However, the FSC stated that it will consider phased implementation to avoid harm to low-income groups. It also plans to advance the DSR calculation method to reflect the borrower's actual repayment ability by considering future income based on lifetime income cycles and rationalizing the applicable loan term.

Financial Services Commission Chairman Eun Sung-soo said, "We will strive to balance conflicting goals between active financial support, stable household loan suppression, and ultimately helping ordinary people own their homes."

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