Korea eyes cap on credit loans to curb rising household debt

[Photo by MK DB]

South Korean financial authorities are mulling measures to regulate the limit on credit-based loans to a certain percentage of annual income as household debt continues to grow.

According to financial industry sources on Tuesday, the authorities are reviewing measures to apply the loan-to-income (LTI) ratio to personal unsecured loans, and the plan is to restrict unsecured loans to a certain percentage of annual income. Some banks that are already tightening lending policies, including mortgage loans, are reportedly also considering reducing unsecured loan limits independently of regulatory measures.

Currently, assuming no other loans are held, a 40 percent debt service ratio (DSR) would allow individuals to borrow up to 180 percent of their annual income in unsecured loans (based on a five-year term with fixed payments). But major banks typically limit unsecured loans to approximately 150 percent of their annual income.

If the LTI regulation is applied, the loan limit is likely to be set at 100 percent of annual income, meaning that unsecured loans would not exceed one‘s annual salary.

The balance of unsecured loans at the top five banks - KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH Bank - increased by 849.5 billion won ($633.5 million) in August 2024 after decreasing by 214.3 billion won in June and 171.3 billion won during the previous month. The increase in household loans and mortgage loans among the top five banks also hit record highs of 9.63 trillion won and 8.9 trillion won respectively in August. These figures are attributed to a last-minute rush to borrow before mortgage loan limits are tightened in September as real estate prices continue to trend upwards, particularly for apartments in Seoul.

The authorities are also considering lowering the maximum guarantee ratio for housing deposit loan insurance from the current 100 percent to below 80 percent. Insurance agencies currently back the repayment of loans taken out for long-term rental housing deposits, with banks often neglecting rigorous loan screening due to the 100 percent guarantee ratio. Authorities believe that lowering this ratio would lead to stricter screening by banks and a consequent reduction in lending. They are also considering reducing the proportion of borrowers with high DSRs at each bank.