Second-tier Financial Institutions to Apply 'Provisions' on Credit Limits Starting Next Year

[Asia Economy Reporter Kim Jin-ho] Financial authorities have decided to introduce reserve requirements for limit-type loans in the secondary financial sector starting next year. Limit-type loans refer to loans that allow borrowers to withdraw and use money within a set limit, similar to a negative balance account.

On the 26th, the Financial Services Commission (FSC) announced a regulatory amendment to the Supervisory Regulations on Mutual Savings Banks, Specialized Credit Finance Companies, and Mutual Finance Companies, outlining these changes.

The FSC took this measure considering issues such as insufficient risk management systems for unused balances of limit-type loans and payment guarantees in the secondary financial sector, which have led to under-provisioning of reserves. Currently, banks and insurance companies set aside reserves for unused amounts of limit-type loans, but the secondary financial sector is not subject to these regulations.

First, an obligation to set aside allowance for loan losses on unused balances of limit-type loans was imposed. Specifically, to strengthen risk management systems and improve regulatory discrepancies, a basis was established for provisioning allowance for loan losses on unused balances of limit-type loans in the secondary financial sector, which previously did not set aside such reserves. The credit conversion factor will be gradually increased up to 40%.

Additionally, allowance for loan losses must also be set aside for payment guarantees by credit finance companies. Currently, credit finance companies are only required to set aside reserves for payment guarantees related to real estate project financing (PF) debts, with no regulations for payment guarantees outside of real estate PF. Accordingly, the FSC plans to improve regulations to require allowance for loan losses for payment guarantees by credit finance companies beyond real estate PF. The credit conversion factor for payment guarantees is 100%.

The FSC plans to implement the system starting July next year after a public consultation period. An FSC official stated, "Along with the schedule for amending supervisory regulations, we will also proceed with revising the detailed enforcement rules of supervisory regulations to reflect unused balances of limit-type loans and payment guarantees in capital ratios."

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