Regulations fail to stem debt rise
By Kim Tong-hyung
Financial authorities have vowed to throw everything they have at the country’s consumer debt mountain, which now threatens to outstrip an entire year’s gross domestic product (GDP). But to the majority of observers, it appears the officials are doing nothing at all, if not actually making things worse.
It was two months ago when the Financial Services Commission (FSC) announced a fresh set of measures to tackle the increasing problem of personal indebtedness, aimed at assisting households in repaying loans and suppressing irresponsible lending by banks.
None of the measures appear to be working as prescribed, evidenced by household debt increasing by 19 trillion won in the second-quarter to reach 876 trillion won (about $806 billion) at the end of June.
The Bank of Korea’s (BOK) measurements are based on borrowing from financial institutions like banks, credit card firms and state housing finance agencies. When combining unsecured loans, non-interest paying debt and money borrowed by the self-employed and non-profit organizations, the scale of debt is believed to have surpassed one quadrillion won to essentially match last year’s GDP.
Out of desperation, financial regulators last week pressured the country’s leading lenders like Woori, Shinhan, Hana and Nonghyup to halt many of their household loans until the end of the month, which doubled as a glaring confession of their ineptitude. Critics claim that the knee-jerk response could aggravate family finances by exposing more people to the crippling interest rates of secondary lenders and loan sharks.
The demand for borrowing is expected to rise significantly in the coming months. Consumer prices continue to lose their sense of gravity, bills for utilities, fuel and college tuition have spiked, and rents have been soaring to record-high levels ahead of the fall moving season.
Promoting more fixed-rate loans in mortgages, which mostly have floating rates, is at the core of the FSC’s moves, dubbed by the media as the ``June 29 measures.’’ Banks are also being pressured to increase their offering of amortizing loans that have no grace periods and provide longer maturities.
These types of loans currently combine for just 5 percent of home-backed loans approved by banks, but FSC officials declared that the proportion will be pushed to 30 percent by 2016. So far, all signs point to policymakers being forced to eat their words.
Fixed-rate loans account for 4.2 percent of the mortgage loans provided by Hana Bank, up merely 0.1 point from the level at the end of June. Fixed-rate loans account for just 0.4 percent of home-back loans approved by Woori Bank. KB Kookmin Bank, which competes closely with Woori for the title of Korea’s biggest banking group saw its share of fixed-rate loans increase by 0.8 point over the two months to 4 percent.
Banks are also lukewarm about providing amortizing loans without grace periods. Hana’s share of these loans increased 0.6 point over the two months to 6.6 percent, while the gains for KB Kookmin, Woori, Shinhan and Nonghyup ranged between 0.1 and 0.5 point.
Banks claim it’s difficult to sell fixed-rate loans when the expectations for low interest rates persist.
Despite the household debt problem and soaring inflation, policymakers have been reluctant to raise interest rates as they question the country’s ability to cope with higher borrowing costs. Most of the current mortgages provided by banks are built on floating rates with no principle amortization and many of their customers have tended to switch banks and take out new loans with lower rates when grade periods expire.
The heady mix of negatives surrounding the global economy, including the sovereign debt problems in the United States and Europe, suggests that the country won’t be seeing firming interest rates any time soon.
``The expansive monetary policy will likely continue here and elsewhere for maybe the next two or three years. This means that fixed-rate mortgages won’t become fashionable until 2015 or 2016,’’ said an official from one of the banks.
``For providing loans offering fixed-rates for 10 to 30 years, banks need to acquire capital on stable rates, and this is hard to do in the domestic financial market where the trading of bank bonds is nearly non-existent.’’
The FSC has also demanded banks lower their loan-to-deposit ratios to 100 percent by June 2012, from the original deadline of the end of 2013, and is also considering further lowering the minimum requirement.
The loan-to-deposit ratio, a measurement of a bank’s financial health, represents the percentage of a bank’s loans against the amount of its deposits. A reading in triple digits means that the bank extended more loans than it could raise funds. As of the end of March, the country’s 13 commercial lenders saw their average loan-to-deposit ratio reach 97.1 percent.
The FSC has also strengthened its monitoring of banks’ risk-management capabilities and plans to raise the risk-weighted value of the Bank for International Settlements (BIS) ratios on high-risk mortgages.