Regulation on household debt to toughen

Calls growing for steps to curb household debt

By Yoon Ja-young

The steep increase in household debt is prompting the government to give a second thought to the deregulation of loans, amid warnings that maintaining the viability of debt should come before boosting the real estate market.

As a first step, the government is planning to control household loans by mutual financing companies.

The Financial Services Commission (FSC) held a meeting Wednesday to discuss how to control household loans from mutual financing companies such as cooperatives.

The total household loans by mutual financing companies, including Nonghyup, credit cooperatives and community credit cooperatives, stood at 139.1 trillion won as of September, up 8.8 percent from a year ago.

The FSC showed concern over the high ratio of mortgages at these cooperatives, as they will be directly affected by an economic downturn.

The government decided to maintain a loan-to-value (LTV) and a debt-to-income (DTI) ratio at mutual financing companies. It will also limit the amount of loans a community credit cooperative can offer per person. The cooperatives that have steep increases in loans will be the target of strong monitoring.

Adopted during the housing market boom, the LTV and DTI restrict the amount of housing loans a person can borrow in accordance with the value of the home and their annual income. However, the government eased this regulation at banks in August, hoping to boost the real estate market and stimulate the economy.

Coupled with a series of key rate cuts by the central bank, the deregulation prompted household debt to snowball.

According to the Bank of Korea, the household loans by banks and non-bank lenders totaled 730.6 trillion won as of the end of October, which is 7.8 trillion won more than a month ago. That is the steepest monthly increase ever. Compared with a year ago, the household loans increased by 8.1 percent.

Analysts have expressed concern over the increasing debt as much of the borrowed money is estimated to have been spent on daily living expenses rather than buying houses.

“One should take heed over the risks of a household default, following a key rate hike or changes in economic conditions,” said Chang Min, a senior research fellow and director at the Korea Institute of Finance.

Following data submitted to Rep. Oh Je-se of the main opposition New Politics Alliance for Democracy, the National Assembly Research Service said the LTV and DTI should be strengthened.

“There should be comprehensive measures prepared with regard to household debt, on top of strengthening coordination between policies. The regulation on soundness of the loans, such as the LTV and DTI, should be strengthened,” it said.

The Korea Development Institute (KDI) also pointed out that the easing of the LTV and DTI regulation went hand in hand with the key rate cut, accelerating the growth of household debt.

Adding to the concern is the fact that households are losing their capability to pay back loans.

The ratio of household debt to disposable income, which reflects the household’s capability to pay back loans, reached 137 percent as of September, which is 2 percentage points more from early this year. The ratio has been rising continuously since 2010 when it stood at 128 percent.