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| Doh Kyu-sang, Vice Chairman of the Financial Services Commission (FSC), speaks at a financial risk meeting held at the headquarters of the Korea Federation of Banks located in central Seoul, Friday afternoon. / Courtesy of FSC |
By Anna J. Park
Amid growing concerns that rising household debt could pose a serious risk to a stable economic recovery, the nation's financial watchdog has come up with a set of measures to tighten rules regarding excessive lending to homeowners.
"It seems inevitable that household debt is increasing as people whose livelihoods have been impacted by the COVID-19 pandemic try to make ends meet. However, the FSC regards the excessive leverage created by credit (non-collateralized) loans flowing into the real estate market as undesirable," Lee Se-hoon, director general of the financial policy bureau at the Financial Services Commission (FSC), said during a press conference Friday.
According to the FSC, the increase in household debt was slowing between the fourth quarter of 2016 and the first quarter of 2020. However it began to increase in the second quarter of this year, with the rate reaching 5.2 percent, following 4.6 percent in the first quarter.
The FSC believes that the increasing debt can mainly be attributed to three factors: increased difficulty in meeting the cost of living due to the pandemic; the desire to invest in stock markets; and the purchases in the real estate market. The financial authority said in an official press release that the household debt increase rate exceeded 7 percent in October and so it needs to proactively respond so that this doesn't become a risk factor for the economy.
The FSC will regularly check on banks to see whether they are keeping up with voluntary credit loan levels, saying that it will conduct monthly inspections.
"For the short-term, the FSC aims to actively supervise whether banks keep their voluntary-set optimal level of credit loans, followed by the strengthened application of the debt service ratio (DSR). From the next year, if COVID-19 is stabilized, the FSC will consider normalizing the loan-deposit ratio, which has been eased due to the pandemic, as well as comprehensive household debt management based on the DSR," Lee noted during the briefing.
The FSC director general also mentioned that mortgage loan evaluation standards will be shifted to the DSR from the current DTI ― debt to income ― in the future. The financial watchdog said it considers a 40 percent DSR to be an appropriate level to be maintained for the medium- to long-term.
Later, high-level FSC officials also held a round of meetings with related officials from the finance ministry, Financial Supervisory Service, Korea Life Insurance Association, General Insurance Association of Korea as well as the Korea Federation of Banks at the latter's headquarters in central Seoul.
"The FSC once again urges financial institutions to fine-tune household debt management, so that while strictly evaluating excessive leverage for speculative intent, those who really need liquidity won't be stopped from receiving the necessary money," FSC Vice Chairman Doh Kyu-sang reiterated during the meeting.
The FSC also said it will launch a taskforce later this month to prepare another set of policies on managing household debt.
