Moon Jae-in Government's Real Demand Loans Also Tightened... Financial Authorities to Announce High-Intensity 'Additional Measures' Soon (Comprehensive)

Core of 'Repayment Ability Assessment'... High-Intensity Regulations Expected Including DSR Strengthening
Strict Loan Regulations for Actual Demanders Such as Jeonse Loans Also Under Strong Consideration

[Image source=Yonhap News]

[Asia Economy Reporter Kim Jin-ho] Financial authorities, who are preparing additional measures to curb the rapid increase in household debt?a major risk factor 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 the suppression of household debt growth while allowing loans within the scope of repayment ability.”

The additional loan regulation scenarios based on repayment ability assessment mainly mention 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 vulnerable groups and genuine borrowers do not face difficulties, the consensus in the market is that all three scenarios will have significant ripple effects.

First, the early introduction of DSR is almost certain. Initially, the Financial Services Commission planned to implement the borrower-specific DSR 40% regulation in three phases. The DSR 40% regulation 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 homes priced over 600 million KRW in regulated areas and to credit loans exceeding 100 million KRW. The plan was to expand the scope to total loans 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 the first phase of DSR was applied. In fact, from July to September, after the first phase of DSR was implemented, the increase in household loans at the five major commercial banks reached about 14 trillion KRW.

Regulations on so-called genuine borrower loans, such as jeonse loans, are also expected. Financial authorities have so far not applied strong regulations to genuine borrower 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 the National Assembly’s Political Affairs Committee audit last week that loan regulations on genuine borrowers are necessary to achieve this year’s household debt growth target.

Regarding jeonse loan regulations, measures are 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 this would reduce loan limits.

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

Since the end of last year, after significantly tightening loan regulations on banks, the balloon effect has become evident in secondary financial institutions. According to statistics from the Financial Supervisory Service, the card loan balance of seven dedicated card companies?Shinhan, Samsung, KB Kookmin, Hyundai, Lotte, Woori, and Hana?was 33.1788 trillion KRW in the first quarter of this year, a 9.5% (2.874 trillion KRW) increase from one year earlier (30.3047 trillion KRW).

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 genuine borrowers should not suffer damages.

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