Concerns Over Balloon Effect... Financial Authorities Consider Early Application of DSR to Card Loans (Comprehensive)

Banking Sector Tightening Balloon Effect Blocked
"Self-Employed Needing Quick Cash May Be Pushed Outside Institutional Finance"

[Asia Economy Reporters Kim Jin-ho and Ki Ha-young] Financial authorities are considering the early implementation of the total debt service ratio (DSR) for card loans (long-term card loans), originally scheduled for July next year. This measure takes into account concerns that a so-called 'balloon effect' could occur due to comprehensive tightening on banks and savings banks.

According to financial authorities and the financial sector on the 25th, the Financial Services Commission is reviewing a plan to significantly advance the schedule for applying DSR amid growing concerns over the recent surge in card loans. Currently, the DSR limit per borrower is 40% for banks and 60% for non-bank financial institutions. Regulations on card loans have been deferred until July next year.

The financial authorities' focus on card loans is largely due to the sharp increase recently. Since the end of last year, loan regulations on banks have been significantly tightened, clearly causing a balloon effect toward the secondary financial sector. According to statistics from the Financial Supervisory Service, the card loan balance of seven major card companies?Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana?reached 33.1788 trillion KRW in the first quarter of this year, a 9.5% (2.874 trillion KRW) increase from 30.3047 trillion KRW a year earlier.

Go Seung-beom, the nominee for Financial Services Commission Chairman, has also expressed the need to advance the 'DSR regulation schedule.' On the 17th, Go stated, "We will review whether the schedule to gradually expand the DSR regulation by July 2023 is appropriate and whether the loose DSR regulation level in the secondary financial sector could cause a balloon effect, and prepare supplementary measures accordingly."

In his written response submitted to the National Assembly's Political Affairs Committee on the same day, Go also hinted at strict management of household debt. He said, "If necessary, we will utilize all available policy tools and actively discover and implement additional measures," adding, "It is important to establish a lending practice that focuses on borrowers' repayment ability by expanding borrower-level DSR and spreading credit screening based on repayment capacity."

A financial sector official said, "It is highly likely that the strengthening of card loan DSR will be discussed at the confirmation hearing on the 27th," and predicted, "After the hearing, the new chairman will officially announce additional measures against the balloon effect, including card loans, as his first statement."

As financial authorities weigh the early implementation of DSR for card companies, the card industry is concerned that self-employed individuals urgently needing funds may be pushed outside the formal financial system. While they agree with the risk mitigation intent due to the rapid increase in household debt, they argue that regulations on general card loans, not related to housing funds, should be pursued cautiously.

Given that card loans are mainly used by middle- and low-credit borrowers, if regulations are tightened, card companies will have no choice but to lend primarily to high-credit borrowers with relatively higher disposable income for risk management reasons. However, among card loan users, 6 out of 10 are multiple debtors who have taken out three or more loans from financial companies, and most of these multiple debtors are small-scale self-employed individuals. An industry insider said, "Card loans are often used by customers who need urgent funds and repay them," expressing concern that "if loan regulations are tightened, card companies will inevitably reduce loans to small-scale self-employed and low-credit customers with low disposable income among existing card loan clients."

Another industry official said, "It appears that financial authorities are reviewing various household debt control measures, including changes to the DSR calculation method and total household loan limits," adding, "If borrower-level DSR is introduced within this year, it is expected that there will be tight time constraints for building systems linked with the entire financial sector."

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