ED Constraint on unsecured loans
Make prudential regulation more market-friendly and rational
Major commercial banks are scrambling to cut their unsecured loan balance prematurely following the government's announcement of a plan to tighten its debt service ratio (DSR) regulation. NH NongHyup slashed the caps on unsecured loans and prime rates early last week, and KB Kookmin began applying measures for the strengthened DSR rule Monday. Other banks are also making similar moves.
The Financial Services Commission (FSC) announced Nov. 13 that it will change the DSR rule on borrowers with cumulative non-collateralized loans of 100 million won ($90,500) or more, effective Nov. 30. Specifically, the 40 percent DSR will apply to high-income individuals who earn more than 80 million won a year with over 100 million won of unsecured loans. This means that a high-income individual who already has over 100 million won of unsecured loans cannot get additional loans if their total annual debt payments exceed 40 percent of their salary. If anyone who owes banks over 100 million won buys a property in the regulated area, they must pay back the principal within two weeks.
It's not difficult to understand why the top financial regulator is trying to place restrictions on unsecured loans. At a time when mortgage lending is regulated strictly to curb rising housing prices, the FSC can feel tempted to stop unsecured loans from flowing into the property market. The spike in household debt is alarming, too. Household debt hit a record high of 1,682 trillion won ($1.5 trillion) in the third quarter.
As people have rushed to banks to borrow money before Nov. 30, there have been some side effects. Above all, the new rule has applied to even those in the middle and lower income brackets. KB Kookmin, for example, applies the 40 percent DSR rule to everyone whose unsecured loans exceeded 100 million won regardless of income. This indiscriminate regulation on unsecured loans might undermine banks' independent evaluation function and self-management. It's imperative to make prudential regulation more market-friendly and rational.