Banks lending to be restricted

By Kang Seung-woo

Korea will come up with tighter lending regulations on banks to try and rein in household debt, the head of the nation’s financial watchdog said Thursday.

“The financial watchdog will seek to stem excessive growth of household debt and make efforts to amend its structure to soften the impacts of rate hikes,” Financial Supervisory Service (FSS) Governor Kwon Hyouk-se said in a forum held at the National Assembly.

His remarks came after the country’s household debt hit a record 801.4 trillion won as of the end of the first quarter, with debt per household reaching 46.11 million won, up 7.7 million won from three years ago.

In addition, households' capacity to repay debt worsened during the same period as debt increases outpaced the growth of gross national disposable income in the past 10 years, with the amount owed averaging an annual 10 percent increase, compared with the latter’s 5 percent.

As part of supervising the soundness of financial institutions, Kwon said the FSS will closely monitor lending practices and tighten control on the loan-to-deposit ratio to keep excessive growth in check.

The loan-to-deposit ratio, the measurement of a lender’s solvency, is the percentage of a bank’s loans to its deposits. The higher the ratio is, the more the bank depends on borrowed funds.

The financial watchdog also intends to order non-banking institutions whose main customers are those with low credit ratings and small-income earners to increase loan-loss provisions in a bid to push for strong risk management.

He added that the FSS will encourage lenders to beef up long-term fixed-rate loans rather than floating-rate debt to prevent households from being exposed to risks if interest rates rise and to restrain the lending practice of stretching the principal payment period.

Kwon also said that the number of financially struggling savings banks will come to light by late September.

“The financial authorities expect to see how many savings banks are insolvent by late September, as the banks’ capital-adequacy ratio set by the Bank for International Settlements (BIS) will be announced and accounting firms will be done with auditing at that time,” Kwon said. “The FSS plans to overhaul the troubled sector and we will hammer out the details with the Financial Services Commission (FSC).”

The FSS is the executive arm of FSC.

The savings bank scandal has been wreaking havoc on the nation’s financial industry after soured construction loans hit the secondary lenders hard.

Since January this year, the FSC has suspended the operations of eight savings banks including Busan Mutual Savings Bank, the largest by assets in the country, due to liquidity shortages.

As of Thursday, one entity has been sold to Woori Financial Group, the nation’s No. 2 banking group ― the remainder is also up for sale.

“Based on inspections, the FSS will force distressed savings banks to clean their balance sheets and if they fail to live up to expectations, we will intensively restructure them,” Kwon said.