[Debt's Counterattack] Frozen Money Flow Next Year... Drought Extends to Card Loans and Savings Banks

Second-tier Financial Institutions Also Strengthen DSR Standards
Real Loan Thresholds Rise Significantly
Urgent Need for Fundamental Measures Like Demand Management

[Asia Economy Reporter Kiho Sung] Office worker Park Myungjin (28, pseudonym) moved in 2019 from Anyang, Gyeonggi Province to Mapo-gu, Seoul, close to his company. To prepare the 150 million KRW deposit for an officetel, Park used the government’s ‘Jeonse Deposit Loan for Small and Medium Enterprise Employment.’ With a 100% guarantee from the Housing and Urban Guarantee Corporation (HUG), he borrowed 100 million KRW from a bank and covered the remaining amount with a personal loan. Having taken on excessive debt to cover housing costs, Park recently faced worries. From next year, the guarantee ratio by government guarantee institutions like HUG may be reduced, which could lower loan limits or increase interest rates even upon renewal. Even if he tries to get additional loans, the strengthened Debt Service Ratio (DSR) regulations starting next year make it uncertain whether he can borrow money at all. Park lamented, "If I can’t get a loan, I’ll have to look for semi-monthly rent or monthly rent options, but even that is uncertain, so I feel at a loss."

Since the second half of this year, with financial authorities’ strong regulations raising the bar for loans, the funding sources for real demand borrowers have been blocked, and next year, financing is expected to remain difficult. This is because the strengthened DSR system, introduced as a regulatory measure amid the surge in household debt due to the COVID-19 aftermath, ‘Yeongkkeul’ (borrowing to the limit), and ‘Debt Investment’ fever, will be fully implemented starting next month. Loans from secondary financial institutions, such as card loans used as quick cash sources, are also expected to be tightened by strengthened regulations, so the loan drought for vulnerable groups is likely to continue.

According to the financial sector on the 29th, major commercial banks will simultaneously resume loans that had been closed starting next month. NH Nonghyup Bank will increase the limits on personal loans and overdraft accounts from next month. Woori Bank will raise preferential interest rates on 4 out of 10 personal loan products and mortgage loans by up to 0.6 percentage points starting from the 3rd of next month. Toss Bank will resume personal loan products from the 1st of next month.

With the annual loan volume targets for each bank being reset from January 1 next year, and the resumption of suspended loans, some relief is expected. However, concerns have been raised that the actual perceived loan threshold may rise further with the DSR regulations taking effect from next month. From next year, DSR regulations will apply to borrowers with total loans exceeding 200 million KRW, and from July, to those exceeding 100 million KRW. According to NICE Information Service’s data submitted to the Financial Services Commission as of the end of September, the total number of household loan borrowers is 19,990,686. According to data received by Rep. Kang Min-guk of the People Power Party from the Financial Services Commission, 2,639,635 borrowers with loans over 200 million KRW can only borrow up to a 40% DSR ratio in the banking sector, and from July, the number of regulated borrowers will increase to 5,953,694.

With a 40% DSR applied, a borrower with an annual income of 50 million KRW can only borrow up to 20 million KRW in annual principal and interest from banks. Even turning to secondary financial institutions, the limit is 25 million KRW. For borrowers who already have significant loans, the capacity for additional borrowing is further reduced.

Professor Sung Tae-yoon of Yonsei University’s Department of Economics said, "Strengthening DSR is meaningful," but also pointed out, "If DSR becomes a barrier for borrowers with sufficient actual income and creditworthiness simply to curb the increase in household debt and prevent the numbers from rising, it is undesirable."

Loan volume targets for banks have also decreased. Due to government pressure to curb household loan growth, management will be maintained at 4-5% levels, lower than this year’s 5-6%. This means bank loan supply will decrease.

It is also expected to become more difficult to borrow money from secondary financial institutions used by low-income people who cannot cross the bank threshold. From next year, the average DSR standards by sector in the secondary financial sector will also be strengthened. In particular, card loans, a quick cash source for low-income people, will be included in borrower-level DSR regulations, further reducing the limits available to borrowers who already have loans.

Experts advise that more fundamental solutions are needed. Professor Kim Sangbong of Hansung University’s Department of Economics said, "The current increase in household debt cannot be effectively curbed by financial policies or regulations alone," and advised, "Efforts should be made in parallel to manage additional loan demand through stabilizing real estate prices and to correct conditions that rely excessively on debt through fundamental restructuring of the self-employed market."

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