Uncontrollable Household Loans... Authorities Announce Additional Regulations

Discussion on Measures at Tomorrow's TF Meeting... Possible Reduction of DSR in Secondary Financial Sector
In July, Total Financial Sector Increased by 15.2 Trillion Won... Secondary Financial Sector Rose by 5.6 Trillion Won

[Asia Economy Reporter Kwangho Lee] Despite financial authorities' efforts to tighten household loans, the increase in loans has not slowed, raising the possibility of additional regulations. Inside and outside the financial sector, there is speculation that the financial authorities may introduce a measure to lower the total debt service ratio (DSR) for borrowers in the secondary financial sector to the level of the primary financial sector.

According to financial authorities on the 17th, the Financial Services Commission will hold the "2nd Household Debt Risk Management Task Force (TF) Meeting" on the 18th of this month to discuss household debt management measures.

Since Deputy Chairman Do Gyusang of the Financial Services Commission stated at the first meeting on the 15th of last month that regulations would be further strengthened if household loans in the secondary financial sector continue to increase, attention is focused on what message will be delivered at this meeting.

Since last month, financial authorities have expanded the application of the 40% DSR rule in the primary financial sector to houses worth more than 600 million won in regulated areas to curb household loans. Additionally, since May, the loan-to-value (LTV) ratio regulation of 70% on non-housing collateral loans, previously applied only to mutual finance institutions, has been extended to the entire financial sector including banks. Nevertheless, the craze for borrowing to invest (debt-financed investment) and borrowing to the limit (borrowing to the soul) continues unabated, especially among those in their 20s and 30s in the real estate and stock markets.

According to the Financial Services Commission, household loans across all financial sectors increased by 15.2 trillion won in July, an expansion from the 10.3 trillion won increase in the previous month. Housing mortgage loans surged by 7.5 trillion won in one month, a larger increase than the 6.4 trillion won in the previous month. The net increase in other loans such as credit loans also rose from 3.9 trillion won in June to 7.7 trillion won in July. Notably, household loans in the secondary financial sector increased significantly, with a net increase of 5.6 trillion won last month, far exceeding the 3.9 trillion won increase in the previous month.

Financial authorities believe that borrowers who lack loan limits due to DSR regulations have massively moved to the secondary financial sector. They are also paying attention to the interconnectedness among banks, capital companies, and mutual finance institutions. Currently, the DSR limit is 40% for the primary financial sector and 60% for the secondary financial sector. This has led to a balloon effect where borrowers flock to the relatively less regulated secondary financial sector to obtain larger loans.

Deputy Chairman Do warned, "If the increase in household loans in the secondary financial sector, exploiting regulatory arbitrage, continues, we will promptly eliminate the regulatory arbitrage between the primary and secondary financial sectors." Since the secondary financial sector has higher loan interest rates but more relaxed loan limits compared to the primary financial sector, the number of borrowers taking loans from the primary financial sector and additionally borrowing from the secondary financial sector within the DSR criteria is increasing, and this will not be tolerated.

A financial authority official said, "We are carefully monitoring market conditions and reviewing various measures through continuous meetings," but declined to elaborate further.

In addition to the DSR regulation on the secondary financial sector, financial authorities plan to link the household loan growth rate and risk level to the deposit insurance premium from next year, applying discounts or surcharges of up to 10%. This means that financial companies' deposit insurance premiums will be lowered or raised depending on the household loan growth rate.

Furthermore, financial authorities recently held meetings with bank credit executives and requested that the individual limit on credit loans such as overdraft accounts be lowered to the level of annual income. Currently, the credit loan limit at banks is about 1.5 to 2 times the annual income, and lowering it to the annual salary level is interpreted as an intention to reduce excessive credit loans.

Meanwhile, financial authorities have set the household debt growth target for this year at 5-6%. Since the household debt growth rate was 8-9% in the first half of the year, it must be managed at 3-4% in the second half to achieve the annual target. The goal for next year is to reduce it to the 4% range.

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