Warning Signs of Excessive Loans in Han... "Lend Only to Those Who Can Repay"

"Disciplinary Measures for Violations of the Overloan Prohibition Clause Must Also Be Specified"

[Asia Economy Reporter Park Sun-mi] Due to rising housing prices and excessive competition among banks, over 60% of household debt in South Korea is identified as overborrowing. It has been pointed out that lending practices should be established based on borrowers' repayment ability, and disciplinary measures for financial institutions violating over-lending prohibition clauses should be specified.

According to the report "Regulatory Implications on Overborrowing in Major Countries" released by the Korea Institute of Finance on the 1st, as of the end of the first quarter this year, the number of borrowers with a Debt Service Ratio (DSR) exceeding 40% accounted for 29.1% of the total. The scale of overborrowing also reached 62.7%. Generally, overborrowing refers to loans that exceed the borrower's repayment ability or loans that, while not exceeding repayment ability, are executed unnecessarily due to excessive solicitation. Financial authorities classify borrowers with a DSR over 40% as high-risk debtors and overborrowers.

The significant increase in overborrowing is attributed to intensified competition in bank lending due to the entry of internet-only banks, increased funding demand caused by the sharp rise in Jeonse prices, and increased loan and living expense demands from small business owners due to COVID-19.

Senior Research Fellow Shin Credit-sang of the Korea Institute of Finance diagnosed, "There is a cycle of overborrowing formed by banks increasing loans to expand market share, which lowers interest rates, and then expanding loans again to compensate for the narrowing Net Interest Margin (NIM)." He also analyzed, "Excessive repayment guarantees on public mortgages and Jeonse deposit loans are expanding banks' pursuit of risk-free profits and incentives for overborrowing."

Currently, major countries such as the United States, Europe, and Japan are responding with policies in three main directions to minimize overborrowing: ▲regulating overborrowing behaviors in contract terms and business practices ▲strengthening disclosure obligations to borrowers ▲enhancing the roles of regulated credit financial institutions and policy finance.

These countries also specify disciplinary provisions, such as ordering compensation, modifying contract terms to appropriate levels, and prohibiting foreclosure when financial institutions violate principles to prevent overborrowing. In Korea, although provisions related to repayment ability assessment and disclosure obligations are being strengthened or newly established in individual sector laws (Banking Act, Mutual Savings Banks Act, Credit Card Act, Loan Business Act), the report points out that specific punitive provisions are insufficiently detailed.

Research Fellow Shin suggested, "To manage overborrowing, it is necessary to gradually establish the original meaning of DSR regulation that reflects the borrower's total debt repayment burden." He added, "Punitive provisions for violations of the Financial Consumer Protection Act's suitability and appropriateness requirements and the Loan Business Act's over-lending prohibition should also be specified so that financial institutions can establish conservative lending practices centered on repayment ability under their own judgment and responsibility, regardless of government regulations."

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