ED Eased lending control

Regulators should not give up curbing runaway household debt

The financial authorities have taken a step backward from their draconian lending regulations. “We won't stop the jeonse (home rental based on large deposits) loans or lending to help pay back the balance for apartment purchase until the end of this year,” Financial Services Commission (FSC) Chairman Koh Seung-beom said last Thursday. “The FSC will tolerate it even if the increase of these loans pushes the growth rate of the balance of household debt beyond the initial target of 6 percent.”

Since the monetary authorities tightened lending controls without considering people desperate for bank loans, various adverse effects have occurred in financial markets. Commercial banks that had already exceeded the 6 percent limit, including Nonghyup Bank, began to suspend mortgage loans and jeonse loans from late August, rapidly increasing the number of people who were forced to give up pre-ordered apartments and creating “jeonse refugees,” those unable to borrow money from banks to secure rental homes. Some have turned to nonbanking lenders or even loan sharks who demand far higher interest payments.

The eased lending restriction is a step in the right direction, but the government's policy flip-flops must be pointed out. Although jeonse loans account for a large share of household debt growth, most of these borrowers are tenants with a dire need for loans. Besides, there are slim chances of these loans going sour because banks extended them with the debt guarantee of the Korea Housing Financing Corp. or Seoul Guarantee Insurance Co. The FSC's need to control household debt is understandable, but it should have made a more flexible approach from the start.

The financial authorities should present a viable solution, minimizing harm to borrowers while curbing the surge of household debt when they announce the policy package this week. Korea's household debt totaled 1,805 trillion won ($1.52 trillion) as of June 30, up 10.3 percent from a year ago. Now that major countries' central banks have begun to raise the benchmark interest rates, the bursting of asset bubbles is bound to trigger economic crises. The government should take pre-emptive steps to protect desperate borrowers while slowing the pace of the household debt increase and reducing its aggregate sum. It must also remember that stabilizing the housing market is the real cure for the household debt problem.