Introduction of Bank Loan Pre-Approval, Advancement of Loan System?..."Sparks in Asset Market and Increased Weight in Banking Sector"

[Asia Economy Reporter Lee Seon-ae] The strengthening of the application of the Financial Consumer Protection Act means stricter screening of investment loans, which is expected to have a negative impact on risky asset markets such as real estate, stocks, and virtual assets. On the other hand, it is likely to create investment opportunities in the traditional banking sector, as it is positive from a long-term perspective.

On the 18th, Seo Young-soo, a researcher at Kiwoom Securities, said, "Although there is a possibility of increased costs such as labor and bad debt expenses, these can be sufficiently reflected through price pass-through. Moreover, it can reduce excessive debt risk and increase profit stability. This is a burdensome issue for internet-only banks and fintech companies, where it is difficult to adequately assess suitability and appropriateness through non-face-to-face channels, and it can greatly contribute to easing competition among banks." He added, "I maintain an overweight opinion on the banking sector."

The Financial Consumer Protection Act is a system recognized as a global financial standard, introduced by major advanced countries worldwide after experiencing financial crises due to financial imbalances caused by excessive debt-driven growth. It started in the United States in 2010, and in September 2011, the OECD announced principles on financial consumer protection, leading major countries worldwide to adopt it. The fundamental purpose of the law is to prioritize consumer damage protection over consumer benefits as a regulatory standard, to early block predatory financial damage, and to separate and make independent the consumer protection supervisory function. Macroeconomically, it aims to prevent household debt from being used as a means of economic stimulus any longer.

Korea also prepared the law in 2011 but delayed its implementation until after the private equity fund incident, revising and introducing it in March 2020, with a one-year grace period and a six-month guidance period. Despite sufficient grace and reflection periods, the law was not properly established due to a lack of understanding of the Financial Consumer Protection Act by financial companies and some financial authorities. However, after the COVID-19 crisis, the rapid rise in housing prices and the resulting excessive increase in household debt risks emerged as core issues of financial instability, bringing the Financial Consumer Protection Act back to the forefront as a means to address these problems.

The current financial authorities have required strict compliance with the suitability and appropriateness principles of the Financial Consumer Protection Act when handling household loans. Accordingly, the banking sector, at the level of the Banks Association, has created and distributed an ‘industry common checklist’ that can identify the purpose of funds, total asset and debt size, fixed expenditure relative to annual income, and types of loan repayments, which is scheduled to be implemented from January 2022.

Researcher Seo said, "Although criticism regarding the effectiveness has been raised due to a lack of understanding of the law, if the supervisory authorities consistently pursue the policy, the loan screening system is expected to fundamentally change like in advanced countries such as the United States."

Simply introducing a pre-screening system to comply with the suitability and appropriateness requirements under the Financial Consumer Protection Act can sufficiently control loans for investment purposes such as stocks, real estate, and virtual assets, as well as overconsumption loans. Furthermore, if financial companies’ MyData business is activated, it is expected that they will be able to understand customers’ asset and loan situations and determine whether the purpose is investment or overconsumption. After establishment, a consistent loan system is expected to be built regardless of the government’s policy direction.

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