Second-tier banks pushed to tighten lending amid rising household debt
The financial regulator had sent a message to the Korean Savings Banks Association on Friday urging its member firms, including savings banks and mutual financial unions, to keep the maximum amount of credit for individuals below their annual income, the sources said. The FSS found that household credit demand has remained high, supported by ample liquidity amid the record-low interest rate environment, they said.
In general, savings banks have a personal loan limit between 100 million won and 150 million won ($ 85,000 to $ 127,000). Tax authorities plan to closely monitor efforts by tier two financial institutions to put in place stricter surveillance of household debt, with the aim of keeping the growth rate of household lending below 21 percent in tier two banking circles.
The move is designed to prevent what is known as the “balloon effect” after tax authorities recently capped the size of loans from top-tier lenders, an official with the Financial Services Commission said.
Just as a balloon expands wherever you push it, households have increasingly gone to savings banks, credit unions, or municipal credit unions to borrow money.
According to the FSS, the volume of household lending by financial institutions in the second category increased by 21.7 trillion won in the first half of this year compared to the end of last year.
Since July, the monetary policy FSC has been using a stricter credit calculation for mortgage loans, the so-called debt service ratio, which measures how much a borrower has to pay in principal and interest payments in relation to his annual income.
According to the new rule, which only applies to first-class banking circles, a borrower must repay 40 percent of annual income if he buys a home worth more than 600 million won in designated speculative areas.
In response to tighter lending regulations from financial authorities, the National Agricultural Cooperative Federation, the parent company of NongHyup Financial Group, recently decided to temporarily stop offering so-called “group loans” from its financial cooperatives, including agricultural commodity and livestock cooperatives, while maintaining their current one Debt service ratio tightened by 60 percent.
The group loans are given en masse to several borrowers of a certain group who have applied for the same home business without an individual credit check.
Meanwhile, criticism of the government’s move to alleviate household debt worries is mounting among people who have rushed to borrow from banks to make ends meet amid the pandemic.
“Not all borrowers pay out borrowed money to buy a home or stock. For small traders and low-income households hard hit by the ongoing COVID-19 pandemic and subsequent economic fallout, the bank’s lending is the last resort, “an industry source said.
By Choi Jae-hee ([email protected])