Financial Authorities Take Firm Stance, Targeted Management of 'NongHyup' Amid Household Loan Surge (Comprehensive)

Mutual Finance Net Increase of 9.4 Trillion in H1... Nonghyup Accounts for 86% with 8.1 Trillion

[Asia Economy Reporter Kwangho Lee] Financial authorities have pinpointed the National Agricultural Cooperative Federation (Nonghyup) as the cause of the surge in household debt within the secondary financial sector and have begun targeted management. This is because the majority of the net increase in household loans from mutual finance institutions in the first half of this year came from Nonghyup. The financial authorities have summoned loan officers to reiterate total loan volume management and are conducting on-site guidance, while planning to impose strong penalties depending on future trends.

According to financial authorities on the 21st, the new loan amount in the secondary financial sector, including insurance, savings banks, and mutual finance, reached 21.7 trillion won in the first half of this year. Among these, the net increase in household loans from mutual finance institutions such as Nonghyup, credit unions, fisheries cooperatives, forestry cooperatives, and Saemaeul Geumgo was 9.4 trillion won, with new loans from Nonghyup alone accounting for 8.16 trillion won (86.8%). This is a sharp increase compared to 710 billion won in 2019 and a decrease of 390 billion won in 2020.

This shows a significant difference compared to increases from other mutual finance institutions. In the first half of this year, fisheries cooperatives and Saemaeul Geumgo increased by 670 billion won and 470 billion won respectively, while forestry cooperatives increased by only 280 billion won. Credit unions decreased by 150 billion won.

Shift to Secondary Financial Sector Due to DSR Regulations... Focus on Affiliate Linkages

Financial authorities analyzed that demand to secure loans before the strengthening of various regulations, including the Loan-to-Value ratio (LTV), and the Debt Service Ratio (DSR) regulation implemented this month, which limits borrowers’ total debt principal and interest repayment, have led customers with insufficient limits to flock to mutual finance institutions. Particular attention is being paid to the affiliate linkages among banks, capital companies, and mutual finance institutions.

Accordingly, financial authorities plan to strengthen on-site guidance centered on branches by summoning loan officers to order total household loan volume management. The Financial Supervisory Service held a video conference on the 16th, considering the COVID-19 situation, to instruct mutual finance executives to manage household debt. The Financial Services Commission also plans to separately summon loan officers to demand active household loan management.

Currently, the DSR limit is set at 40% for banks and 60% for non-bank sectors. As a result, a balloon effect is occurring where borrowers flock to the relatively less regulated non-bank sector to obtain larger loans. Financial authorities have also identified that secondary financial institutions, including Nonghyup, are taking advantage of this opportunity to actively increase household loans.

For now, financial authorities intend to monitor market trends while expressing caution about the increase in household loans through communication. However, if the increase in household loans in the secondary financial sector does not stop despite continuous verbal pressure, they plan to apply stricter loan regulations.

Plan to Lower Secondary Financial Sector DSR Ratio to Bank Level Under Review

Inside and outside the financial sector, it is expected that the Financial Services Commission will propose lowering the DSR ratio for the secondary financial sector to the level applied to banks. There is also speculation that the application timing of the DSR regulation, which has been deferred for card loans until July next year, may be moved up.

At the ‘1st Household Debt Risk Management Task Force (TF)’ meeting, Do Kyusang, Vice Chairman of the Financial Services Commission, stated, "We will establish a more detailed management system to ensure the household debt growth rate is managed without fail this year," and warned, "If the increase in household loans in the non-bank sector continues by exploiting regulatory arbitrage, we will promptly eliminate the regulatory arbitrage between banks and non-banks."

A financial authority official emphasized, "If household loans in the non-bank sector continue to increase, we will consider various measures including additional regulations and strive to manage risks," adding, "We will make every effort to ensure the stable management of household debt, including the smooth implementation of household debt management measures."

In this regard, a financial sector official said, "The increase in household loans in the non-bank sector is because households without homes have taken out many mortgage or unsecured loans to purchase their own homes," and warned, "Additional loan regulations may cause a disruption in financial services for low-income households."

Financial authorities plan to manage this year’s household loan growth rate at around 5-6% and reduce the growth rate to the pre-COVID-19 level of around 4% next year.

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