The Emerging Loopholes in Loan Regulation Easing... Office Workers Ask, "What About Us?"

Expansion of Inclusive Finance
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[Asia Economy Reporter Park Sun-mi] As financial authorities prepare to announce a ‘household debt management plan’ next month aimed at lowering the growth rate of household loans, they are simultaneously creating ‘gaps’ by easing loan regulations. This has increased feelings of alienation among salaried workers with tight budgets who are burdened by rising loan interest rates and reduced loan limits. Although this aligns with the government’s direction to strengthen inclusive finance by enhancing financial support equity for low-income and low-credit individuals to minimize inequality, concerns are emerging that these measures, implemented amid tightening loan regulations, may cause side effects such as increased alienation among ordinary workers and greater burdens on the financial sector.

◆Continuous Strengthening of Inclusive Finance Amid Loan Regulations= According to the government and financial authorities on the 31st, the Financial Services Commission announced the ‘Policy for Reforming the Supply System of Policy-Based Microfinance’ the day before, which includes temporarily supplying refinancing products with interest rates exceeding 20% per annum and lowering the interest rate of the Sunshine Loan 17 by 2 percentage points. This is a follow-up measure to the reduction of the legal maximum interest rate from 24% to 20% starting July 7.

The reform plan focuses on expanding the safety net of policy-based microfinance for low-income and low-credit individuals. For those who have repayment ability but find it difficult to reuse existing high-interest loans upon maturity, a refinancing product called ‘Safety Net Loan II’ will be supported with a limit of 300 billion KRW starting in the second half of the year. From the second half of the year, the Sunshine Loan 17 interest rate will be lowered by 2 percentage points to 15.9%, with further reductions possible depending on market conditions. The supply scale of ‘Sunshine Loan Youth,’ which supports young people who have difficulty accessing formal financial institutions, will be increased by an additional 100 billion KRW beyond the existing plan.

Financial authorities are also considering easing loan regulations that can provide more practical help in forming a housing ladder for young people and the homeless. The Financial Services Commission is coordinating with related ministries on a plan to partially ease loan regulations such as the Loan-to-Value ratio (LTV) and Debt Service Ratio (DSR) exclusively for young people and the homeless, with related details expected to be announced next month. The political sphere has also emphasized that “plans to expand the scope and targets of various benefits provided to the homeless and first-time homebuyers will be pursued.”

In the market, this is seen as a potential expansion of preferential benefits for LTV and Debt-to-Income ratio (DTI) applied to the homeless, contrary to the previous direction of controlling the real estate market through loan regulations. Earlier, financial authorities extended loan maturity extensions and repayment deferrals for small and medium-sized enterprises and small business owners classified as COVID-19 affected groups by six months until September.

[Image source=Yonhap News]

◆Salaried Workers with Tight Budgets Trapped by Regulations= The problem lies in the fact that household and corporate debt has increased to 2.16 times the Gross Domestic Product (GDP), reaching an all-time high, prompting the government and financial authorities to tighten loan regulations. However, the easing of loan regulations has created ‘gaps,’ intensifying confusion.

The ‘household debt management plan’ to be announced next month by financial authorities is expected to include measures to expand the application of the Debt Service Ratio (DSR) regulation, currently averaged at 40% per bank, to individual borrowers and to mandate principal installment repayments as part of loan regulation strengthening. Commercial banks are already managing total loan volumes by raising loan interest rates and reducing loan limits ahead of the announcement. Since the end of last year, they have significantly reduced the limits on large lump-sum unsecured loans to between 100 million and 200 million KRW and have also cut limits on overdraft accounts.

Borrowers’ interest burdens are also increasing. According to the Bank of Korea, the loan interest rate for deposit banks based on new loan amounts last month was 2.74% per annum, up 0.02 percentage points from the previous month. This means that borrowers who have borrowed to the maximum (Yeongkkeul, meaning ‘pulling together all resources’) or invested with borrowed money (Bittou, meaning ‘debt investment’), as well as ordinary salaried workers, will pay more interest to banks.

On internet communities and elsewhere, there are complaints that while the government is announcing strong regulations on borrowers who have the ability to repay, it is opening funding channels for borrowers with higher repayment risks. Most criticisms focus on the current situation where interest rates decrease even if credit scores drop due to poor credit management.

The burden of contributions for microfinance loans on financial companies has also increased.

Previously limited to mutual finance institutions and savings banks, the institutions required to contribute to microfinance have expanded to all financial sectors handling household loans, including banks, insurance companies, and credit finance companies. This will impose a funding contribution burden totaling 1 trillion KRW over the next five years, amounting to 200 billion KRW annually. A bank official expressed concern, saying, “The Moon Jae-in administration pushed for inclusive finance with the intention of improving a fair financial structure so that low-credit individuals are not driven to illegal private loans, but this could be interpreted as meaning financial companies should not make profits and should only provide welfare for low-credit individuals.”

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