Due to Commercial Banks' Total Loan Volume Regulation... Year-End 'Loan Refugees' Expected to Surge

Loan Total Increase Target 4~5%...Stricter Than Last Year
Loan Amount Must Be Reduced to Meet Year-End Target

Bank Customers May Not Even Borrow Up to 40% DSR

Savings Banks Also Raise Loan Thresholds for Low-Credit Borrowers

[Asia Economy Reporters Sim Nayoung and Song Seungseop] The outstanding household loans of the five major commercial banks decreased for the first time in eight months in January, providing relief to the Financial Services Commission, which has positioned itself as a ‘household debt fighter.’ However, concerns about ‘loan refugees’ are emerging behind the scenes. The immediate challenge is the DSR (Debt Service Ratio) regulation implemented last month, but the financial industry predicts an even bigger hurdle will come at the end of the year.

This is because the Financial Services Commission raised the target growth rate for total household loans in the banking sector this year (4-5%) compared to last year (5-6%). Last year, the household loan amount in the banking sector is estimated to have increased by 110 trillion KRW compared to the previous year, but this year, it can only increase by up to 97 trillion KRW. This also means that the amount of money domestic banks can lend to households will decrease by about 13 trillion KRW compared to the previous year.

A representative from a commercial bank said, "To meet the target set by the authorities, banks will start actively managing the total household loan volume from the fourth quarter. For example, Bank A might have been lending without difficulty until the third quarter, but to meet the 4% growth rate by the end of the year, the only way is to reduce lending to customers."

In this case, borrowers who were only allowed to repay up to 40% of their annual income in principal and interest under the DSR regulation may face situations where they cannot borrow even up to this limit by the end of the year. At the end of last year, banks also resorted to raising loan interest rates as they hurried to curb lending to meet the total loan volume target.

The government says it will increase the supply of real estate this year, but financial authorities tightening loans is seen as a contradictory policy. A senior government official said, "It has become harder to borrow money from banks, so how can real demand buyers buy houses without new loans?" and added, "There are voices within the government saying that the total loan volume regulation needs to be supplemented."

[Image source=Yonhap News]

The loan thresholds for secondary financial institutions and private lenders, mainly used by low-credit borrowers, are also rising. This is due to the reduction of the legal maximum interest rate and the total household loan volume regulation. Last year, the legal maximum interest rate was lowered from 24% per annum to 20%, and the total loan volume regulation target for savings banks was strengthened from 21.1% to 10.8-14.8%.

Financial Services Commission Chairman Ko Seung-beom announced that he would consider excluding mid-interest rate loans from the total loan volume regulation to ease borrowing for low-credit borrowers, but there has been no news for two months. A savings bank official said, "We have requested that mid-interest rate loans be excluded from the regulation, but there has been no directive from the financial authorities yet." As of February this year, more than 60% of the 79 savings banks do not lend to low-credit borrowers (below 600 points). More than 10 savings banks had a low-credit loan ratio of less than 1%.

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