Reduction of Public Guarantees... Will It Become Harder to Get Jeonse Loan Next Year?

Financial Services Commission 2022 Work Report Presentation
"Review of Risk Sharing Measures for Financial Companies"
Concerns Raised Over Possible Strengthening of Supervision

[Image source=Yonhap News]

[Asia Economy Reporter Kiho Sung] The government is considering reducing public guarantees for jeonse loan funds after next year's presidential election. According to the government's plan, loan guarantees may be restricted based on income or deposit size, raising concerns that access to jeonse loans could become more limited next year.

On the 25th, according to the financial sector, the Financial Services Commission recently announced in the '2022 Financial Policy Direction' report that it will "consider measures to reduce excessive reliance on public guarantees for jeonse loans and encourage risk-sharing by financial companies." This is explained as an effort to improve the qualitative structure of household loans.

So far, jeonse loan funds have been criticized for having relatively low regulatory levels, such as not being included in the calculation of the Debt Service Ratio (DSR). Additionally, guarantee institutions such as the Korea Housing Finance Corporation, SGI Seoul Guarantee, and the Korea Housing & Urban Guarantee Corporation have been providing guarantees for financial companies' jeonse loans at rates of 80-100%. This has led to criticism that excessive lending is taking place.

Meanwhile, recently, the rapid increase in jeonse loan funds has been identified as a major cause of household debt growth. As of the end of June, the outstanding balance of jeonse loans at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup Bank) was 148.5732 trillion won, an increase of 26 trillion won over one year.

Previously, financial authorities strongly considered including jeonse loans in the DSR as part of the October 26 household debt management strengthening measures but stepped back citing the need to ensure housing stability for low-income households. Also, jeonse loans were excluded from the total volume management limit for the fourth quarter of this year. However, with the plan to review the reduction of public guarantee limits for jeonse loans in next year's work plan, there is speculation that regulations on jeonse loans will be significantly tightened starting next year.

If public guarantees are reduced according to the government plan, it is expected that obtaining jeonse loans will become more difficult. Banks will inevitably conduct stricter loan screenings as guarantees are reduced.

The financial sector anticipates that jeonse loans will become more difficult to obtain. A financial sector official said, "Public guarantees are almost like the borrower's credit, so if this part is reduced, banks will inevitably strengthen their screening." He added, "Also, depending on next year's election and other factors, the policy stance could become even stricter, so in the worst case, jeonse loans might be included in the DSR calculation."

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