Lee Yeon-woo is a financial journalist at The Korea Times. Her wide range of reporting includes policies, macroeconomics, stock market, companies and even crypto. She is passionate about connecting the dots in Korean finance and making it easier for foreign nationals to understand. Based on her previous experience as a national reporter, she also has a keen interest in social issues within the sector, including gender equality and ESG. Your tips and insights are always appreciated. You can send them to yanu@koreatimes.co.kr.
Tightened lending rules drive demand to second-tier banks
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By Lee Yeon-woo
As Korean financial authorities tighten loan restrictions for first-tier banks, demand has now shifted to second-tier lenders. This unexpected "balloon effect" has led mutual savings banks to announce stricter loan regulations, with financial authorities also expected to introduce additional measures.
According to industry sources, MG Community Credit Cooperatives halted providing mortgage loans to multiple homeowners starting Tuesday. This cooperative — one of the biggest in Korea — has seen the sharpest increase in loans among similar institutions, with loan amounts rising by approximately 1 trillion won ($725 million) last month. This is nearly half of the total household loan growth in the secondary financial sector here.
In October, the total household loan balance across the financial sector rose by approximately 6 trillion won from the previous month. Of that amount, loans from the secondary financial sector surged by over 2 trillion won, marking the largest increase since November 2021. This growth is attributed to demand shifting toward second-tier lenders as banks reduce household lending.
The National Agricultural Cooperative Federation, the National Credit Union Federation of Korea and the National Federation of Fisheries Cooperatives have also followed suit. Their shared focus is on limiting mortgages for multiple homeowners and strengthening the screening process for group loans, though the timing of these changes varies.
These series of measures follow a request from financial authorities for second-tier lenders to limit household loan amounts in November and December, compared to October levels.
Financial authorities are also reviewing further regulatory steps in case this trend continues unabated, according to sources. The Financial Services Commission will hold a household loan inspection meeting on Nov. 11, where they are expected to announce enhanced management plans.
One of the most powerful measures under consideration is requiring secondary financial institutions to submit annual targets for household loan amounts. Currently, only first-tier banks are required to submit such data, allowing financial authorities to mandate tailored policies for each institution.
Measures to strengthen the debt service ratio requirements (DSR) for household loans in the secondary financial sector are being discussed, to curb consumer demand. The DSR is the ratio of a borrower's principal and interest payments to their annual income, with the current threshold set at 40 percent.
Currently, financial authorities add an additional 1.2 percentage points of stress interest rate when calculating the DSR for mortgage and credit loans from banks. A 0.75 percentage point rate is applied to mortgages in the secondary financial sector. Higher stress rates reduce borrowers' loan limits, and authorities are now considering raising the stress rate for second-tier financial institutions to 1.2 percentage points as well.
However, around 1 trillion won, or roughly half of last month's loan increase in the secondary financial sector, is reported to be credit loans or card loans for essential living expenses rather than mortgages.
"Much of this demand has shifted to the high-interest secondary sector after borrowers were unable to secure loans from banks. Further tightening in the secondary sector could push mid- to low-credit borrowers, who urgently need cash," an industry official said.