Korea mulls revising debt service ratio to restrain household loans

[Image source: Gettyimagesbank]

South Korea’s financial authority has rolled up its sleeves to restrain household debt that has been growing at a rapid pace by devising measures such as revising the country’s debt service ratio (DSR).

The Financial Supervisory Service (FSS) is expected to hold comprehensive discussions on principle and interest repayment and income calculation methods that are the basis to the DSR regulation, according to Lee Joon-soo, senior deputy governor of the FSS, on Thursday.

His remarks were made in a meeting with bank chiefs in Seoul aimed at enhancing internal control and household loan management.

The FSS assesses that current household loan growth is not at a level that would trigger a financial crisis but there is a risk of a surge in the future as expectations of interest rate cuts and rising asset prices grow.

“The total volume of household loans remains low compared to the same period last year,” said an FSS official. “We need to consider various circumstances, but if the total volume of household loans approaches peak levels, we can strengthen our response.”

The total volume of household loans began to decline in September last year, shrinking by about 26 trillion won ($19.41 billion) in March this year.

However, household loans have turned upward following the growing demand for the government‘s special mortgage loans and banks’ 50-year long-term mortgage loans, resulting in a gain of 12 trillion won in the past four months.

The FSS plans to conduct a comprehensive inspection of household loan practices among banks from August to October.

Lee from the FSS, in the meantime, urged banks to manage the pace and scale of their loan growth.

“It is important to manage the scale and pace of loan growth, both for overall household loans and for specific borrower groups, to ensure that they remain within a range that is consistent with the bank’s lending policy, risk management policy, and capital management plan,” Lee said.

Given that the financial authorities implemented a loan quota system in 2021, there is interest in what additional measures may be taken if the current loan growth trend does not stabilize.

The meeting also discussed internal control operations to prevent banking accidents. Lee asked the heads of banks to personally organize a comprehensive check on whether the internal controls to prevent accidents are working effectively.

The FSS plans to promote various measures to strengthen internal controls within the banking sector, including expanding on-site spot inspections at bank headquarters and branches, cross-verifying self-inspection results, enhancing the reporting system for financial accidents, and increasing the weight of internal control evaluations in overall management assessments.