Regulator to impose penalty on lenders that exceed loan limits

Courtesy of Yonhap News

South Korea‘s four major banks have already exceeded the annual household loan growth limit set for this year, prompting intervention from the financial authority.

According to the Financial Supervisory Service (FSS) on Tuesday, the four banks – KB Kookmin Bank, Shinhan Bank, Hana Bank, and Woori Bank – had initially targeted a household loan growth of 9.3 trillion won ($7 billion) for 2024.

However, by mid-August, household loans had already surged by 14.1 trillion won, reaching 151.6 percent of the target.

Shinhan Bank had aimed to cap its household loan balance at 120.5 trillion won by the year’s end, but by August 21, the balance had already hit 122.3 trillion won, surpassing the target by 1.8 trillion won. KB Kookmin Bank‘s loan balance exceeded its target by 1.5 trillion won, while Hana Bank and Woori Bank went over their limits by 900 billion won and 600 billion won respectively.

Financial authorities attribute this surge in loan demand to rising property prices in Seoul and expectations of possible interest rate cuts, combined with banks’ prioritization of profits over effective household debt management.

The country’s financial authority plans to accelerate efforts to control bank loans.

By the end of the year, it will calculate debt service ratios (DSRs) for all banks and impose penalties on those that exceed this year‘s household debt management targets.

If a bank’s average DSR is 35 percent this year, it may be required to reduce it to 30 percent in next year‘s plan, which will likely force banks to cut back on household lending.

The FSS has noted that household debt growth has reached unmanageable levels this month.

Household loans increased by 6 trillion won in May, 5.9 trillion won in June, and 5.5 trillion won in July. The FSS expects the increase in August to exceed those of June and July. The FSS considers a monthly household debt increase of 5.5 trillion won or less to be manageable.

Mortgage loan demand has been driving household debt growth.

In the first 23 days of August, the mortgage loan balance at five major banks, including NH Nonghyup Bank increased by 6.82 trillion won. In July, the balance at these banks rose by an all-time high of 7.6 trillion won.

The financial authority is also reviewing the effectiveness of recent household loan management measures by the banks. Over the past two months, banks have raised mortgage rates 22 times to curb loan demand, but with limited success.

In response to regulatory pressure, banks are now shifting their focus from adjusting interest rates to controlling the total volume of loans.

“As mortgage loan demand surged, the banks’ response to simply raise interest rates was highly inappropriate,” the FSS said.

The authorities are also monitoring the potential impact on the non-banking sector, including insurance companies.

Recently, mortgage rates offered by insurers have fallen below those of banks. With looser lending regulations, there is concern that demand may shift to these institutions. The FSS plans to focus on managing speculative investments with enhanced credit loan screening.