Surge in Credit Loans Amid Debt Investment Craze...Risk of Defaults Raises Concerns of Another Freeze

[Asia Economy Reporter Kangwook Cho] Concerns over household debt defaults are growing amid ongoing household loan management policies and an early-year 'loan rush.' As commercial banks unlocked credit loans at the beginning of the year, loan amounts exceeded 450 billion KRW in just four days, with daily loan demand increasing. This has drawn market attention to whether financial authorities will tighten loan regulations again.

According to the financial sector on the 9th, the outstanding balance of credit loans at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?increased by 453.3 billion KRW over four trading days from January 4 to 7. On January 4, the first day credit loans resumed after a temporary suspension at the end of last year, the balance surged by 279.8 billion KRW, followed by increases of 64.7 billion KRW on the 5th, and 60.4 billion KRW and 48.4 billion KRW on the 6th and 7th, respectively.

This growth trend is considered unusual compared to previous years. Typically, in January, credit loan demand decreases and savings deposits increase due to year-end bonuses. The surge is attributed to borrowers' 'let's just get it for now' mentality after experiencing a loan cliff and the borrowing frenzy driven by the stock market rally.

At the end of last year, when financial authorities imposed credit loan regulations, commercial banks effectively locked down loan access. The outstanding credit loan balance at the five major banks decreased by 44.3 billion KRW compared to the previous month in December. However, with the resumption of credit loans in the new year, suppressed demand flooded in at once, accelerating the growth rate of credit loans, according to banking sector analysis.

The KOSPI breaking through 3,000 points for the first time and the stock market heating up daily are also cited as factors stimulating loan demand. The financial sector believes that a significant portion of funds flowing into the stock market from individual investors comes from credit loans.

Financial authorities are closely monitoring the situation. Within three days of credit loan resumption, more than 20% of the monthly credit loan increase limit (2 trillion KRW) managed by the authorities was consumed. However, since some banks have only relaxed previously reduced credit loan limits, the authorities plan to observe the situation for the time being. At the end of last year, government and bank loan regulations aimed at curbing household debt growth by reducing loan demand sparked complaints from office workers and small business owners pushed into a 'loan cliff.'

Following the financial authorities' request to manage total household loans, savings deposits at the five major commercial banks shrank by about 7.5 trillion KRW in one month. Besides the analysis that ultra-low interest rates have caused a 'money move' from savings deposits to stock market and real estate waiting funds, there are also concerns that social distancing at level 2.5 and year-end difficulties in the self-employed sector have increased urgent cash needs among ordinary citizens.

Although the previously blocked credit loan channels have reopened, loan conditions for ordinary citizens are expected to worsen this year. At a press briefing at the end of last year, Yoon Seok-heon, Governor of the Financial Supervisory Service, stated, "Total loan volume regulation (on banks) is necessary for the time being."

Moreover, with a regulatory plan that sets the total loan amount based on income expected to be introduced in the first quarter of this year, concerns are growing that more ordinary citizens will be driven to high-interest private loans.

The Financial Services Commission announced in the '2021 Economic Policy Direction Departmental Core Tasks' released at the end of last year that it will prepare an 'Advanced Household Debt Management Plan' centered on strengthening DSR in the first quarter of this year. The plan includes shifting DSR management from financial institutions to borrower units and gradually replacing the Debt-to-Income ratio (DTI) with DSR for mortgage loan repayment ability assessments. DSR is a stricter loan regulation than DTI, representing the ratio of total household loan principal and interest repayments to the borrower's annual income. The total loan amount, including mortgage loans, credit loans (overdraft accounts), and auto installments, is determined according to income.

According to this plan, DSR regulations will be significantly strengthened. Until now, DSR has been regulated by financial institution, but the regulation will be expanded to individuals. With DSR applied, methods such as taking additional credit loans instead of mortgage loans will no longer work. All types of loans are summed to limit the loan size relative to income. Mortgage loan repayment ability assessments will also be gradually replaced by DSR. Therefore, if there are many other loans such as credit loans, mortgage loans will be restricted accordingly.

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