Secondary Financial Institutions Required to Set Aside Provisions for Unused Credit Line Balances Starting July

[Asia Economy Reporter Song Hwajeong] From July, it will be mandatory to set aside allowance for doubtful accounts for unused credit limits and payment guarantees in the secondary financial sector.

The Financial Services Commission announced on the 2nd that it has approved amendments to the 'Mutual Savings Banks Supervision Regulations,' 'Credit Finance Specialized Business Supervision Regulations,' and 'Mutual Finance Supervision Regulations' containing these provisions.

The amendments establish the basis for setting aside allowance for doubtful accounts for unused credit limits and payment guarantees in mutual savings banks, credit finance specialized businesses, and mutual finance. Previously, the financial authorities announced institutional improvement measures in April last year to strengthen the allowance for doubtful accounts for credit limits and payment guarantees in the secondary financial sector as part of household debt management, aiming to systematize risk management and enhance consistency across sectors. These amendments are follow-up measures partially revising related regulations.

Previously, only credit card companies in the secondary financial sector were required to set aside allowance for doubtful accounts for unused credit sales and card loan commitments. However, the amendments provide the basis for setting aside allowance for doubtful accounts for unused credit limits in the secondary financial sector to strengthen soundness and improve regulatory differences between sectors. A credit limit loan refers to a loan with a set limit, such as a minus account. The credit conversion factor is applied at 40%, the same as banks and insurance sectors. Credit sales and card loans will also be uniformly applied at 40%, down from 50%. However, the Financial Services Commission plans to gradually increase the credit conversion factor for unused credit limits to minimize the burden from additional allowance for doubtful accounts. Mutual savings banks and credit finance companies will apply 20% this year and 40% next year, while mutual finance will increase from 20% this year to 30% in 2023 and 40% in 2024.

Allowance for doubtful accounts must also be set aside for payment guarantees. Previously, credit finance companies were only required to set aside allowance for doubtful accounts for debt guarantees related to real estate project financing (PF), with no regulations for payment guarantees outside of real estate PF. The amendments improve regulatory fairness by requiring credit finance companies to set aside allowance for doubtful accounts (credit conversion factor 100%) for payment guarantees other than real estate PF.

The amendments approved by the Financial Services Commission on this day will take effect from July 1.

A Financial Services Commission official stated, "Through amendments to sector-specific enforcement rules, we will improve the capital ratio calculation formulas for mutual savings banks, credit finance companies, and mutual finance to reflect the revised allowance for doubtful accounts regulations."

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