Korea introduces measures to tackle soaring household debt

Chief of staff to the president, Kim Dae-ki, left, and Prime Minister Han Duck-soo [Photo by Kim Ho-young]

South Korea has decided to introduce a floating- rate stress debt service ratio (DSR) this year, which is aimed at reducing the share of floating-rate loans amid soaring household debt that has exceeded 1,800 trillion won ($1.3 trillion).

According to an announcement following consultations between the government, ruling People Power Party, and the presidential office on Sunday, a floating-rate stress DSR will be introduced this year among other measures.

New policies have been carefully crafted, given the already substantial household debts, to ensure they do not pose a threat to financial stability or hinder growth, said Park Jeong-ha, the ruling party spokesperson.

“We will closely monitor the effects of the existing DSR system aimed at restraining excessive debt and, if necessary, take additional measures,” Park said. “In addition to the floating-rate stress measure, various other funding options will be explored to expand long-term fixed-rate loans.”

The floating-rate stress DSR applies a certain level of markup to the DSR calculation.

For example, a borrower with an income of 50 million won has been able to borrow 330 million won at a loan rate of 4.5 percent, based on equal installment payments.

However, when an additional 1 percentage point is applied under the stress DSR, the DSR ceiling will be reduced to 290 million won, according to calculations by the Financial Services Commission.

The decision to strengthen the stress DSR comes from the assessment that the risk level of household debt has increased again, particularly among the young people due to the trend of buying houses.

Earlier, Governor Rhee Chang-yong of the Bank of Korea warned investors not to borrow for investment based on expectations of rising housing prices during a press conference following the policy rate announcement, implying that no interest rate fall is expected in the near future.

While introducing measures to curb household loans, the government and the ruling party have agreed to continue offering special low-interest rate housing loans targeted for the general population and lower-cost houses, even after the initial support target of 39.6 trillion won is met.

The change modifies the initial plan to supply these loans by January. In response to criticism that this contradicts the new policy to curb household debts, Park explained that the decision is based on the belief that household debt and real estate prices are “not issues within the financial system,” while indicating the government’s intention to continue providing policy loans for lower-income families.

Another measure included is enhanced protection for debtors.

The ruling party has decided to push for the enactment of legislation to protect individual debtors, which reportedly includes activating financial company self-debt adjustment, limiting overdue interest, and reducing collection burden, ahead of bill deliberations starting next month.