Prospects for Regulatory Easing Amid 'Loan Refugee' Outcry... Will It Ease Borrowing for Ordinary People?

With Secondary Financial Sector Also Blocked, 'Loan Cliff' Concerns Lead to Shift in Atmosphere
Analysis of Political Pressure Including from Ruling and Opposition Presidential Candidates

[Image source=Yonhap News]

[Asia Economy Reporter Kim Jin-ho] Next year, while high-intensity total household loan volume regulations are expected to continue, loans for low-income and genuine demand borrowers such as jeonse (long-term lease) and group loans are anticipated to be somewhat eased. This measure is interpreted as a response to criticisms that the unprecedentedly strict regulations this year have caused side effects, such as a surge in 'loan refugees.' In particular, there are also criticisms that this relaxation of regulations is a populist move pressured by the political sphere to appease the dissatisfaction of low-income people ahead of the presidential election.

Flexible Operation of Total Household Debt Volume Regulation ... "Loans for Low-Income and Genuine Demand Borrowers Will Not Be Cut Off"

According to the financial sector on the 11th, the Democratic Party and the Financial Services Commission held a 'Household Debt Party-Government Consultation' the day before. Park Wan-joo, the Democratic Party Policy Committee Chair, said to reporters after the consultation, "We plan to operate loans for low-income and genuine demand borrowers such as jeonse and group loans as continuously as possible without cutting them off."

Also, during the consultation, it is reported that there was consideration of excluding medium- and low-credit borrowers and policy-based low-income financial products from the total volume regulation. Regarding this, Financial Services Commission Chairman Ko Seung-beom mentioned at a press briefing on the 3rd, "We are also considering practically excluding them from total volume management," and added, "We will finalize specific incentive measures after consulting with the financial sector within this month."

The ruling party and financial authorities' announcement of a flexible and elastic operation plan for the total household debt volume regulation, including such proposals, is analyzed as an intention to ease the burden on low-income genuine demand borrowers. Although there were brief reports of loan resumptions centered on some banks, even second-tier financial institution loans have been comprehensively blocked, rapidly pushing low-income genuine demand borrowers into a loan cliff.

In fact, credit unions and Saemaeul Geumgo, which are mainly used by low-income people, have recently completely stopped handling household loans. Other mutual finance institutions such as Nonghyup and Suhyup are also not handling new housing-related loans.

Especially, the household loan scale of savings banks, the last bastion of second-tier financial institutions, is also approaching this year's total volume limit (21.1%). According to the industry, as of September, the household loan scale of savings banks was 39.5225 trillion KRW, leaving only about 1.3688 trillion KRW remaining until the total volume limit. Considering the increases in October and November, industry insiders explain that the remaining loan capacity is practically very limited.

First-tier financial institutions also find it difficult to actively provide loans since the level of next year's total volume regulation will be determined based on compliance. As of the end of last month, the average household loan growth rate of the five major banks was 4.61%, leaving less than 0.4 percentage points from the 5% limit set by financial authorities. Although there have been reports of some banks resuming loans recently, consumers' actual perception seems minimal.

It is also analyzed that public criticism of the Moon Jae-in administration by financial authorities and others may have influenced this. As household loans were tightened simultaneously this year, genuine demand borrowers who could not get loans are directing their anger at the government. They argue that they suffered damages because they could not borrow money due to the stringent regulations blocking loans in the financial sector.

In particular, the recent strong criticism by presidential candidates from both ruling and opposition parties regarding the damage to genuine demand borrowers caused by loan regulations likely added pressure on financial authorities and the ruling party. A financial sector official said, "The increased pressure from the political sphere ahead of the presidential and local elections was a significant burden."

Consideration for Genuine Demand Borrowers is Desirable... High-Credit Borrowers Likely to Face Difficulties Next Year

Experts positively evaluate the consideration being given to low-income genuine demand borrowers but point out that it should not be merely a 'show.' Professor Kim Dae-jong of the Department of Business Administration at Sejong University said, "Considering that medium- and low-credit borrowers have suffered the most from the total volume regulation, increasing consideration for financially vulnerable groups is positive," but emphasized, "However, rather than a slight exception from the total volume regulation, full support is necessary."

Meanwhile, unlike medium- and low-credit borrowers, high-credit borrowers are expected to find it difficult to borrow money next year as well. Major banks have proposed a household loan growth target of 4.5-5% to financial authorities for next year. This is up to 1 percentage point lower than this year, raising the loan threshold further.

The individual Debt Service Ratio (DSR) will also be fully implemented six months earlier than before, starting next month. From January next year, for all loans exceeding 200 million KRW in total loan amount, the annual principal and interest repayment amount cannot exceed 40% of annual income. For genuine demand borrowers who need urgent funds at the beginning of the year, borrowing money will become considerably more difficult.

A financial sector official criticized, "The basic logic of finance does not support lending only to those in difficulty and not lending to those who are fully capable," adding, "From the financial companies' perspective, there is a risk that the ratio of non-performing loans could significantly increase."

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