Last Year's Household Debt Growth Rate Stable... Managed Below Potential Growth Rate

Financial Services Commission's 'Household Debt Status Review Meeting'
Establishing the Practice of Borrowing Only What Can Be Repaid

The government evaluated that the household debt growth rate last year remained at a very stable level and announced its policy to manage the long-term household debt growth rate below the nominal growth rate (an indicator that considers the real growth rate and price level). Additionally, to achieve this, it will improve the system to establish a lending practice of 'borrowing only as much as can be repaid and repaying in installments from the beginning,' considering the borrower's future repayment ability.

On the 10th, the Financial Services Commission held a 'Household Debt Status Review Meeting' at the Government Complex Seoul in Jongno-gu, Seoul, chaired by Secretary-General Kwon Dae-young, together with related agencies including the Ministry of Economy and Finance, Ministry of Land, Infrastructure and Transport, Bank of Korea, Financial Supervisory Service, Korea Housing Finance Corporation, Korea Federation of Banks, the five major financial holding companies (KB, Shinhan, Hana, Woori, NH Nonghyup), and the Korea Institute of Finance.

According to the Financial Services Commission, the increase in household debt in December last year was 200 billion KRW, the lowest increase since April last year. The annual increase in household loans (provisional) was also limited to about 10.1 trillion KRW, a 0.6% rise compared to the end of the previous year, maintaining a very stable level compared to previous years. The average annual increase in household debt over the past eight years was 83.2 trillion KRW.

Accordingly, the household debt-to-GDP ratio is expected to fall by 3.7 percentage points from 104.5% last year to 100.8% (estimated). Korea's household debt-to-GDP ratio is anticipated to decline for two consecutive years, from 105.4% in 2021 to 104.5% in 2022, and 100.8% (estimated) last year.

Participants at the meeting positively evaluated the stable management of the increasing trend due to the government's and financial sector's strict household debt management efforts last year but agreed that it is important to manage household debt stably over the long term.

Secretary-General Kwon Dae-young stated, “Last year, the stable management of household debt growth was largely achieved amid the interest rate hike phase, but due to the accumulated household debt, the burden has relatively increased, especially for vulnerable borrowers.” He added, “In response, the government has made policy efforts to manage borrowers' repayment risks and alleviate financial difficulties for low-income and genuine demand groups through institutional improvements such as the introduction of stress DSR and the supply of special Bogeumjari loans.” He emphasized, “To maintain a stable flow of household debt in the future, it is important to consistently and coherently adhere to the following three principles.”

The government outlined the following principles for future household debt management: ▲ managing the annual household debt growth rate within the nominal growth rate ▲ establishing lending practices that consider borrowers' future repayment ability across all household loans ▲ implementing necessary measures to alleviate financial difficulties for low-income and genuine demand groups. Since the household debt-to-GDP ratio remains high compared to major countries, quantitative management will continue to ensure a downward trend, and the scope and content of the Debt Service Ratio (DSR) will be improved to firmly establish the principle of borrowing only as much as can be repaid and repaying in installments from the start.

The direction for household debt management this year was also discussed. The government and related agencies stated, “This year, amid the continued high interest rates and high inflation, there is a risk of an accelerated increase in household debt as expectations for interest rate cuts form within the year, and the difficulties of vulnerable borrowers may worsen due to delayed economic recovery, making balanced policy responses more important than ever.” They added, “On one hand, the increase in household debt must be closely managed, and on the other, various policy efforts must be made to minimize difficulties for low-income and genuine demand groups, addressing these dual challenges.”

To this end, the government plans to closely communicate and meticulously manage all household loans across the entire financial sector to prevent excessive acceleration in household loan growth. It will closely monitor household loan growth through regular meetings with all financial sectors and establish an organic cooperation system with related ministries. Additionally, it will continuously identify and promote necessary institutional improvements to prevent excessive lending.

Active improvements to the DSR system will also be pursued. The government will actively review whether to improve each DSR exemption item, expand the application scope within the range that does not increase the burden on low-income and genuine demand groups, strengthen the role of private financial companies in supplying low-interest, long-term, fixed-rate loans, and closely communicate with the financial sector to ensure that institutional improvements such as stress DSR are properly implemented.

Necessary measures to alleviate financial difficulties for low-income and genuine demand groups will also be steadily implemented. The government will support the continuous supply of policy mortgages for these groups even after the termination of the special Bogeumjari loan and will promote various policy efforts to reduce borrower burdens, such as preparing guidelines to prevent excessive prepayment penalties.

Secretary-General Kwon said, “For household debt to be properly managed, the financial sector itself must share awareness of the importance of household debt with the authorities and carefully consider managing household loans within the economic growth rate when establishing business plans for each financial company. I hope they refrain from management policies focused on expansion or excessive competition that induces unnecessary demand, considering this year's interest rate conditions.” He added, “Since financial users are valuable customers of each financial company, I ask that loans be handled with meticulous attention to detail on-site, ensuring that borrowers' repayment ability is carefully considered according to the suitability principle.”

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