Banks urged to prevent loan bottleneck amid toughened lending rules

The Financial Services Commission in Seoul (Yonhap)

South Korea’s financial authorities have called on local banks to take action to ensure a stable supply of credit loans and tighter supervision of household debts, officials said Sunday. 

The policymaking Financial Services Commission and the market watchdog Financial Supervisory Service reportedly advised the nation’s commercial banks to submit the action plans, which can be either monthly or quarterly, for personal unsecured loans.

The authorities also urged the banks’ top executives to remain on high alert over a possible loan crunch by closely monitoring loan supply systems. 

The nation’s major lenders recently suspended mortgage lending to slow down the growth of household debt under pressure from the financial authorities, in line with the goal of bringing the annual increase in debt below 6 percent this year and below 5 percent next year.

For instance, in August NH NongHyup Bank decided to stop offering home-backed loans, except for so-called “jeonse” loans, until Nov. 30. Jeonse is a housing lease system unique to Korea whereby tenants pay a lump-sum deposit instead of monthly rent on a two-year contract.

“The on-year rise of unsecured personal loans extended by NongHyup Bank surpassed 7 percent, which led to the bank’s suspension of mortgage lending. The FSC will continue to guide banks to offer a moderate amount of credit loans each month or quarter, under a long-term plan so that they won’t inevitably stop offering loans to meet the government’s regulation,” a FSC official said. 

Meanwhile, household credit reached a record high of 1,805.9 trillion won ($2.12 trillion) as of June, up 41.2 trillion won from three months earlier, according to the data from the Bank of Korea. 

While limiting the annual growth of bank loans, the financial authorities on Tuesday implemented stricter requirements for mortgage loans. The “debt-service ratio,” or DSR, gauges how much borrowers can afford to pay in principal and interest in proportion to their annual income. 

The FSC initially planned to extend the 40 percent DSR rule in July next year to borrowers with credit loans, including home-backed loans, worth more than 200 million won. But it decided to impose the regulation six months earlier, in January, amid rising concerns over the pace of household debt growth.

By Choi Jae-hee (cjh@heraldcorp.com)

By Choi Jae-hee(cjh@heraldcorp.com)