Financial Authorities in Final Deliberation Over Additional Loan Regulations... Likely to Strengthen 'Jeonse Loans and DSR'

Additional Loan Regulations to Be Announced as Early as Next Week, No Later Than End of This Month
'Repayment Ability Assessment' Key... High-Intensity Regulations Expected Including Strengthened DSR
Loan Restrictions for Actual Demanders Such as Jeonse Loans Also Likely

[Image source=Yonhap News]

[Asia Economy Reporter Jin-ho Kim] Financial authorities, preparing additional measures to curb the rapid increase in household debt, considered a ticking time bomb for the Korean economy, are in the final stages of deliberation. The additional measures, centered on strengthening the Debt Service Ratio (DSR), include tightening DSR regulations on jeonse loans and Bogeumjari loans, as well as regulating loans from secondary financial institutions to prevent balloon effects.

According to financial authorities and the financial sector on the 13th, the ‘additional household debt measures,’ expected to be announced as early as next week or by the end of this month at the latest, will focus on ‘repayment ability assessment.’ Earlier, on the 27th of last month, the heads of the four major economic and financial authorities held a meeting and announced, "We will seek ways to maximize suppression of household debt growth while allowing loans within the scope of repayment ability."

The additional loan regulation scenarios centered on repayment ability assessment mainly include three points: △ early expansion of DSR regulations △ regulation of jeonse loans △ blocking balloon effects in secondary financial institutions. Although the government states it will strive to ensure that real demand borrowers such as low-income earners do not face difficulties, the market consensus is that all three scenarios will have significant ripple effects on the market.

First, the early introduction of DSR is considered certain. Initially, the Financial Services Commission planned to implement the 40% DSR regulation in three phases. The 40% DSR limits the repayment of principal and interest on loans to within 40% of annual income.

Currently, the DSR regulation is preemptively applied to mortgage loans for houses over 600 million KRW in regulated areas and credit loans exceeding 100 million KRW. The plan is to expand the scope to total loan amounts exceeding 200 million KRW in July next year (phase 2) and 100 million KRW in July 2023 (phase 3), but advancing this schedule is under consideration. This is because household debt shows no signs of slowing even after phase 1 DSR application. In fact, from July to September, after phase 1 DSR was applied, the increase in household loans at the five major commercial banks reached about 14 trillion KRW.

Regulations on so-called real demand loans such as jeonse loans are also expected. Financial authorities have so far not applied strong regulations to real demand loans. However, since jeonse loans have recently been identified as a cause of the rapid increase in household debt, they have made it clear that they will no longer overlook this issue. Chairman Ko stated at last week’s National Assembly audit that loan regulations on real demand borrowers are also necessary to achieve this year’s household debt growth target.

Regarding jeonse loan regulations, a measure is expected to limit the loan amount for those renewing existing contracts to within the increase in the deposit amount. Until now, it was possible to borrow up to 80% of the total deposit amount for jeonse loans, but going forward, loans will only be possible for the increased portion. Additionally, including jeonse loans in the DSR calculation is also being discussed. Currently, jeonse loans are excluded from DSR calculations, but applying them would reduce loan limits.

Early application of DSR to card loans (long-term card loans) is also a likely scenario. This is a measure to address concerns about the ‘balloon effect’ occurring mainly in secondary financial institutions due to comprehensive tightening on banks. Currently, the DSR limit per borrower is 40% for banks and 60% for non-bank institutions, but card loans are exempted until July next year.

Meanwhile, financial authorities are reportedly continuing to deliberate on the detailed plans for these ‘additional household debt measures.’ Initially, they threatened to use ‘all available means,’ but President Moon Jae-in and political circles have expressed opinions that real demand borrowers should not suffer damage.

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