Financial Authorities Pressure to Tighten Household Loans... Financial Firms Convened Ahead of DSR Regulation

[Asia Economy Reporter Lee Kwang-ho] Financial authorities are convening executives of financial associations ahead of the borrower-level Debt Service Ratio (DSR) regulation set to take effect from the 1st of next month. This is interpreted as a preemptive move to pressure household loan management, as there could be a surge in speculative demand before the regulation.

According to financial authorities on the 15th, the Financial Services Commission plans to meet with executives from financial associations including the Korea Federation of Banks, the Life Insurance Association, the General Insurance Association, and the Credit Finance Association on the 17th to review preparations for household debt management measures and convey requests.

A financial authority official said, "We are continuously checking the preparation status with financial companies ahead of the DSR regulation introduction," adding, "This week, we will review related matters with financial associations."

Earlier, on the 4th, financial authorities summoned credit officers from banks, insurance companies, and capital companies to check household loan trends.

This is mainly because, during previous credit loan regulations, there was a concentrated speculative demand to secure loans before the regulation, which led to a significant increase in loan balances. Therefore, preemptive management is being undertaken.

DSR 40% Regulation Expanded from July 1

According to household debt management measures, starting next month, the borrower-level DSR 40% regulation, which currently applies to new mortgage loans for homes priced over 900 million KRW in speculative and overheated speculation zones, will be expanded to homes priced over 600 million KRW in all regulated areas. For credit loans, the income condition will be removed, and the regulation will apply to loans exceeding 100 million KRW. Approximately 83.5% of apartments in Seoul and about 33.4% of apartments in Gyeonggi Province will be subject to this regulation.

From July next year, the DSR regulation will apply to borrowers whose total loan amount exceeds 200 million KRW for both mortgage and credit loans, and from July 2023, the regulation will expand to borrowers with total loans exceeding 100 million KRW. Currently, borrowers with total loans exceeding 100 million KRW account for 28.8% (about 5.68 million people) of all borrowers, representing 76.5% of the total loan amount.

According to a simulation by a commercial bank, a borrower with an annual income of 50 million KRW and a 50 million KRW overdraft account who takes out a mortgage loan for a 700 million KRW apartment in Seoul, a regulated area, can borrow 280 million KRW before July this year, 230 million KRW from July this year, and 170 million KRW after July next year, showing a significant reduction. The simulation assumes an overdraft interest rate of 3% per annum, a mortgage loan interest rate of 2.7% per annum, and a 30-year equal principal and interest repayment period.

Household Debt Growth Rate Managed Around 5-6% This Year

Through household debt management measures, financial authorities aim to bring the double-digit household debt growth rate back to the pre-COVID-19 level of around 4% by next year. This year, considering the COVID-19 situation, the goal is to manage it around 5-6%.

Despite repeated tightening of household loans by financial authorities, the growth trend has not been easily curbed. Although the increase in household loans in the financial sector slightly decreased last month, this was largely due to a temporary sharp drop in credit loans caused by refunds from SK IE Technology (SKIET) public subscription. This month, demand is expected to surge again before the regulation takes effect, likely reversing to an increasing trend.

This is the background for financial authorities to take measures such as reducing limits through financial associations. There are also expectations in the market that the intensity of orders will increase due to concerns about a balloon effect in secondary financial institutions. In fact, the household loan growth rate in the secondary financial sector from January to May this year was 17.8%, a significant increase compared to -4.8% the previous year.

Meanwhile, major domestic banks are adjusting the pace of household loan growth by reducing preferential interest rates and suspending sales of some loan products. Woori Bank has decided to reduce preferential interest rates on five personal credit loan products, and NH Nonghyup Bank plans to reduce loan limits and cut preferential interest rates. Starting today, Nonghyup Bank will temporarily suspend sales of Mortgage Credit Insurance (MCI) loans and Mortgage Credit Guarantee (MCG) loan products, and from the 16th, it will also lower preferential interest rates on jeonse loans, credit loans, and real estate-secured loans other than housing.

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