Financial Authorities Announce 'Ultra-Strong Regulations'... "Last-Minute Loan Rush Expected" (Comprehensive)

March's Top 5 Banks' Credit Loans at 136.2 Trillion Won... Increased by 1.0326 Trillion Won in 4 Business Days
DSR to Apply to All Loans This Month, with 2,100 New Revolving Credit Accounts Opened Daily

Seoul Euljiro Hana Bank loan counter. Photo by Mun Ho-nam munonam@

[Asia Economy Reporter Kwangho Lee] Demand for unsecured loans is surging again in March. Although the stock market's upward trend stalled last month and loan interest rates rose, causing a temporary slowdown, it is analyzed that last-minute demand is flooding in as borrowers try to secure unsecured loans ahead of the financial authorities' announcement of ultra-strong loan regulations scheduled for mid-month.

Unsecured Loans at Five Major Banks Surge in March

According to the financial sector on the 9th, as of the 5th, the outstanding balance of unsecured loans at the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was recorded at 136.2009 trillion KRW. This represents an increase of 1.0326 trillion KRW in just four business days compared to the previous month.

Unsecured loans at the five major banks surged by 1.5918 trillion KRW month-on-month until January due to the booming stock market and real estate investment frenzy driven by "Yeongkkeul" (pulling together all resources) and "Bittou" (investing with borrowed money), but turned to a decline in February. This is attributed to the availability of lump sums such as Lunar New Year bonuses and year-end tax refunds, a shift to a correction phase in the stock market, and rising loan interest rates.

However, the atmosphere changed this month. From the first business day on the 2nd, the number of customers seeking unsecured loans noticeably increased, and the opening of overdraft accounts also surged sharply. The average daily new overdraft account openings in March reached 2,100, far exceeding the previous month's average of 1,600. Shinhan and Woori Banks each saw about 100 new accounts opened in a single day.

This is interpreted as anxiety stemming from the prolonged COVID-19 situation causing varying financial needs across social classes and the possibility that funding sources may soon be cut off due to the strong loan regulations to be announced mid-month.

A representative from a commercial bank said, "In the ongoing financial pressure caused by the prolonged COVID-19 situation, demand for loans is increasing as people try to secure loans before the financial authorities strengthen loan regulations."

In fact, when the financial authorities announced in November last year a DSR 40% regulation on unsecured loans exceeding 100 million KRW for high-income earners with annual incomes over 80 million KRW, last-minute demand surged, increasing the outstanding unsecured loan balance at the five major banks by 1.5 trillion KRW in just one week.

The Financial Services Commission is expected to announce household debt management measures as early as next week or by the end of this month at the latest. The core of this plan is to apply the Debt Service Ratio (DSR), which assesses borrowers' total debt and income to lend according to repayment ability, to all loans. The DSR standard is expected to be set around 40%. This means that the total principal and interest to be repaid annually cannot exceed 40% of annual income. However, the Financial Services Commission plans not to retroactively apply the new system to loans taken before the regulation is implemented.

Households Face Heavy Burden Depending on Future Market Volatility

Experts express concern that forcing loans amid rising market interest rates could impose a heavy burden on households depending on future market volatility.

Professor Juhyun Park of Dongduk Women's University’s Department of Economics predicted, "When the COVID-19 situation settles, interest rates will rise, potentially leading to an economic crisis." He added, "The rapid rise in asset prices in financial markets can be seen as a bubble, and economics consistently teaches that bubbles eventually burst. When the bubble bursts and asset losses occur, vulnerable groups may be unable to repay their debts, which could trigger a major crisis in financial markets and the overall economy."

Professor Taeyoon Sung of Yonsei University's Department of Economics pointed out, "Due to the sharp rise in U.S. Treasury yields, volatility in the domestic financial market will continue to be affected. If housing prices or stock prices plummet, households that borrowed heavily to buy homes or stocks could face significant shocks, so management is necessary."

Earlier, Lee Ju-yeol, Governor of the Bank of Korea, warned at a press conference last month, "If market interest rates rise sharply, it will lead to higher loan interest rates, increasing debt burdens especially for vulnerable borrowers, and volatility in asset markets such as stocks may also increase."

The financial authorities plan to strengthen monitoring of the rapidly increasing household loans. Do Kyoo-sang, Vice Chairman of the Financial Services Commission, emphasized at the Financial Risk Response Team meeting that day, "If global interest rate hikes and synchronization with domestic rates occur, risks such as increased corporate funding costs and higher interest burdens on household loans may arise. We will closely monitor risk factors in each sector of the financial market and prepare to respond promptly if necessary."

Kim Yong-beom, First Vice Minister of Strategy and Finance, also stated at the Macroeconomic and Financial Meeting, "Despite Federal Reserve Chairman Jerome Powell’s reaffirmation of a dovish monetary policy stance, U.S. Treasury yields continue to rise, making it an important variable in international financial markets going forward. Since expectations for economic recovery coexist with concerns about inflation and steep interest rate hikes, market volatility is likely to persist. We will closely watch related trends and respond swiftly."

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