Second-tier banks urged to tighten their lending amid growing household debt

South Korea’s financial watchdog has called on second-tier banks to tighten lending standards on their extension of unsecured personal loans, as part of a move to curb growing household debt, industry sources said on Sunday.

The Financial Monitoring Service sent a message to the Korea Savings Bank Federation on Friday urging its member companies, including savings banks and mutual financial cooperatives, to maintain the maximum amount of credit loans allowed to individuals. below their annual income, the sources said. The FSS noted that household loan demand remained at a high level, supported by abundant liquidity in an environment of record interest rates, they said.

Typically, the savings bank’s limit for personal loans is between 100 million won and 150 million won ($ 85,000- $ 127,000). The financial authorities plan to closely monitor the efforts of second-tier financial institutions to put in place tighter controls on household indebtedness, with the objective of maintaining the growth rate of loans to households in second-tier banking circles. rank less than 21%.

The move aims to prevent the so-called “balloon effect”, following recent measures by financial authorities to cap the amount of loans granted by senior lenders, an official at the Financial Services Commission said.

Just as a balloon expands wherever you squeeze it, households have increasingly turned to savings banks, credit unions or community credit unions, to borrow money.

According to FSS data, the volume of household loans issued by second-tier financial institutions in the first half of this year increased by 21.7 trillion won from the end of last year.

As of July, FSC policy has enforced a stricter loan calculation for mortgages, called the debt service ratio, which measures how much a borrower owes in principal and interest in proportion to their annual income.

Under the new rule, which only applies to senior banking circles, a borrower is required to repay 40% of their annual income if they buy a house worth more than 600 million won in designated speculative areas.

Responding to stricter credit regulations from financial authorities, the National Federation of Agricultural Co-operatives, the parent company of NongHyup Financial Group, recently decided to temporarily stop offering so-called “group loans” in its financial co-operatives, including including cooperatives of agricultural and livestock products. commodity cooperatives, while tightening its current 60% debt service ratio.

Group loans are made en masse to a number of borrowers belonging to a certain group who have applied for the same real estate transaction, without an individual credit rating.

Meanwhile, criticism of the government’s move to ease concerns over household debt is mounting among people who have rushed to take out bank loans to make ends meet amid the pandemic.

“Not all debtors invest borrowed money to buy a house or a stock. For small traders and low-income households hit hard by the protracted COVID-19 pandemic and its attendant economic fallout, bank loans are the last resort, ”an industry source said.

By Choi Jae-hee ([email protected])