Household lending squeeze set to persist into early next year

(Yonhap)

Household borrowers in South Korea are expected to continue facing tight credit conditions at banks into early next year, as financial authorities urge lenders to rein in aggressive loan growth ahead of a reset of annual lending caps.

According to the financial sector on Sunday, the Financial Services Commission is expected to hold a household debt review meeting with major domestic banks around Jan. 13, calling for strict management of household lending at the start of the year. The move is aimed at preemptively blocking any sharp easing of lending standards after banks reset their annual loan targets.

Regulators plan to place greater emphasis on monthly management of household lending next year. Banks that exceeded their lending targets this year will also face a “penalty,” with the excess deducted from their new lending limits to be finalized in February.

The authorities will also raise contribution rates on large mortgage loans. The FSC’s policy plan for next year includes revamping the contribution-rate system for the Housing Finance Credit Guarantee Fund, linking banks’ contribution rates to mortgage loan amounts. Previously, rates varied only by loan type, but from April next year, larger loans will be subject to higher contribution rates, while smaller loans will face lower rates.

Compounding the pressure, recent legal changes will prevent banks from passing contribution-related costs on to borrowers through loan interest rates starting next year. The FSC also plans to support the rollout of non-recourse loans in the second half of next year. Under such loans, borrowers’ repayment obligations are limited to collateral such as housing, prompting banks to take a more conservative view of collateral values and potentially reduce loan sizes.