Financial Authorities to Inspect Non-Mortgage Loans Across All Financial Sectors... Strengthened Regulations from LH Incident Unavoidable (Comprehensive)

Financial Authorities Conduct Comprehensive Review of Non-Mortgage Loans Across All Financial Sectors
Targeted Regulation of Mutual Finance Under Consideration... Stricter Loan Controls Expected Following LH Incident

[Image source=Yonhap News]

[Asia Economy Reporter Lee Kwang-ho] Financial authorities are launching an inspection of non-housing collateral loans across the entire financial sector following suspicions of land speculation by employees of Korea Land and Housing Corporation (LH). This full-scale investigation comes amid criticism that land collateral loans, compared to housing collateral loans, have been relatively overlooked in terms of regulation and supervision. It has been revealed that some regional Nonghyup banks provided large-scale loans to LH employees for land speculation, leading to expectations that regulations on mutual finance loans will be further tightened. Some critics argue that the authorities only belatedly began to assess the situation after public opinion worsened, despite ongoing concerns that loosened non-housing collateral loans could balloon as a side effect of focusing regulations solely on housing collateral and credit loans.

According to financial authorities on the 16th, the Financial Services Commission and the Financial Supervisory Service are currently assessing the status of non-housing collateral loans across the entire financial sector, including mutual finance, banks, savings banks, and specialized credit finance companies.

The Financial Supervisory Service is collecting written data from each financial institution to examine loan volumes by region and type, and based on this, will select targets for on-site inspections. However, since some overlap with the Special Investigation Unit’s work is possible, the timing and scope of the investigation will be coordinated with the Special Investigation Unit before starting on-site inspections. If further suspected cases of land speculation are identified through additional government investigations, the financial authorities may expand the institutions subject to verification for illegal loans.

Despite these moves by financial authorities, criticism has been raised that poor management and supervision by the responsible ministries have exacerbated the situation.

In fact, the loan-to-value ratio (LTV) for non-housing collateral loans in the mutual finance sector ranges from 40% to 70%, which is more lenient than commercial banks (60% for land). Moreover, this is not regulated by law but based on administrative guidance. While commercial banks manage an average debt service ratio (DSR) within 40%, mutual finance institutions only need to maintain an average DSR of 150% until the end of this year, making loans relatively easier to obtain. Non-housing collateral loans, which can be secured by land, commercial buildings, officetels, agricultural machinery, fishing vessels, etc., directly affect the livelihoods of farmers and fishermen whose incomes are relatively unstable, making regulation difficult. Nevertheless, calls for regulatory improvements have continued.

[Image source=Yonhap News]

Clear Balloon Effect in Mutual Finance... Financial Authorities to Announce Strengthened Non-Housing Collateral Loan Regulations

In particular, the government’s ultra-strong regulations on housing collateral and credit loans were expected to cause a balloon effect. Min Hyung-bae, a member of the Democratic Party of Korea, revealed during last year’s National Assembly audit that from September 2019 to July of the following year, new non-housing collateral loans with a DSR exceeding 100% amounted to 3.1624 trillion KRW (about 9,600 cases) at banks. This means that even in commercial banks, where loans are relatively strictly screened, loans were executed despite the borrower’s principal and interest repayment amount exceeding their income.

In the case of mutual finance, the feared balloon effect was clearly evident. According to the office of Yoon Chang-hyun of the People Power Party, the balance of non-housing collateral loans in mutual finance reached 257.5 trillion KRW at the end of last year, increasing by 30.7 trillion KRW in one year. The growth rate of 13.5% was the highest since 2017, when data became available. This far exceeded the overall household debt growth rate of 7.9% last year. Despite the loose regulations applied to land collateral loans through mutual finance, financial authorities had not even grasped the actual situation. While financial authorities concentrated their loan regulations on housing collateral and credit loans, a gap emerged in the ‘war against speculation.’

Voices calling for thorough supplementary measures for mutual finance have also emerged, using the LH incident as an opportunity. Mutual finance was established to support the financial liquidity of farmer and fisherman members, and it is frequently excluded not only from loan regulations but also from various consumer-related laws, leading to frequent exploitation of these ‘loopholes.’

A commercial bank official said, "In the case of mutual finance, screening is less stringent than banks, and it is relatively easy to avoid financial authorities’ supervision, resulting in financial accidents every year," adding, "Thorough institutional improvements for mutual finance, which is a no-man’s land, are urgently needed."

Meanwhile, it is known that the household debt advancement plan to be announced by financial authorities within this month will include regulations on the secondary financial sector, including mutual finance.

In particular, regulations on non-housing collateral household loans are expected to be strengthened. Within the financial sector, options under consideration include expanding non-housing collateral loan regulations to other financial sectors and upgrading regulatory grounds to enforceable ordinances such as enforcement decrees.

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