Lee Min-hyung joined The Korea Times in 2014 and has worked as a journalist mainly in Korea’s finance, tech and automotive industry. He specializes in content creation, breaking news and in-depth analysis currently on transportation and mobility. You can reach him via mhlee@koreatimes.co.kr.
Loan regulations feared to create balloon effect
An office worker walks past the building of a savings bank in Seoul in this Nov. 20 file photo. Yonhap
By Lee Min-hyung
By Lee Min-hyung
Households are feared to fall victim to regulators' ever-toughening lending restrictions amid concerns that those with low credit will be pushed to borrow money from “organizations” imposing higher interest rates.
Banks will drastically restrict households' credit lines in compliance with new financial regulations. The Financial Supervisory Service (FSS) is reiterating its strong determination that the lending restrictions will remain in place for the time being, as household debt continues to snowball to a worrying level.
This, however, drives people in the low-income bracket into a corner, as they are no longer able to get loans from traditional lenders to meet the rapid rise in their living costs and housing prices.
Banks have no choice but to abide by the FSS' call, and have already put a temporary halt on their loan business targeting households. The authority said the decision was inevitable at a time when household debt is growing rapidly amid the nationwide investment boom.
Data released by the Bank of Korea (BOK) showed that household debt topped 1,682 trillion won as of the end of September, up 7 percent from a year ago. Finance market observers are expressing concerns that the surge in the figure is due to a speculation frenzy focused on stocks and real estate investment.
As banks offer the most competitive interest rates, households in dire need of money are expected to turn to so-called second-tier lenders ― such as savings banks and insurers ― if the lending regulations on big banks remain in place for a longer period.
This will put individual borrowers with low credit ratings at higher risk, as loans from the second-tier lenders come with much higher interest rates of between 10 percent and 20 percent a year. In contrast, major commercial lenders offer non-collateral (credit) loans at around 2 percent to 5 percent for most households.
It remains to be seen whether the credit loan regulations will end up creating a balloon effect and put low-credit households in greater danger. Given that those in the low-income bracket have few options in borrowing money and may resort to loans from savings banks, insurers or even private moneylenders, calls are growing for the government's “unilateral” restrictions on credit loans to end immediately.
According to data from the central bank, the total loan balance from the nation's savings banks reached 74.39 trillion won as of the end of October, up by more than 9 trillion won from the end of 2019. What is of major concern is that figure has been rising steeply for the past two years. As of April, their loan balance had topped 60 trillion won, but it surpassed 70 trillion won in July.
Korea University economist Kang Sung-jin argued the government's intervention in banks' credit loan business was a move in defiance of economic logic.
“The main purpose of the regulations are to stop households from investing in the housing market,” Kang said. “But literally speaking, banks offer credit loans to households after reviewing their credit ratings, and it is undesirable for the government to intervene in the process.”
The government should pay more attention to stabilizing the economy, rather than imposing such regulations, according to the economist.
“The rise in household lending also means that their living costs have been rising to weather the tough economic times,” he said. As housing costs account for the largest part of households' living expenses, the most important thing for the authorities to do is to stabilize the real estate market, according to the professor.