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Commercial lenders are likely to raise lending rates amid the government's efforts to curb soaring household debt. Korea has seen the fastest rise in household debt among member countries of the Organization for Economic Cooperation and Development (OECD).
The government seeks to rein in the steep increase in borrowing over the past year amid the economic crisis triggered by the COVID-19 pandemic, as the economy shows clear signs of a rebound with the prospect of herd immunity being achieved sooner than expected.
The pre-emptive move by lenders comes shortly before the implementation of the debt-service ratio (DSR) being capped at 40 percent as part of tightened lending rules to be overseen by the Financial Services Commission (FSC) starting July.
DSR is measured by a borrower's annual income divided by the principal and interest on all household loans including mortgage, credit loans, card loans and stock loans. It is more stringent than the debt-to-income (DTI) ratio which factors in only interest payments on loans, with mortgage principal being the only principal considered.
The prime rate for some credit loans offered by Woori Bank was lowered by up to 0.5 percentage points, Monday, fanning expectations that its peers would follow suit.
According to the Korea Federation of Banks, the annual borrowing rate on credit loans offered by Woori Bank was 2.79 percent in April, the same level as Shinhan Bank. The rate was 2.88 percent for Hana Bank, 2.95 percent for KB Kookmin Bank and 2.68 percent for Nonghyup Bank.
The rush to make borrowing more costly follows a recommendation that Korea's household debt is surging both in pace and size compared to the country's nominal gross domestic product (GDP).
According to a report by the Korea Institute of Finance, the household debt-to-nominal GDP ratio rose at the end of 2019 to 90.3 percent as of the first quarter of this year, up from 83.4 percent at the end of 2019. This is a further increase from 62.7 percent in 2008.
This is far faster than the ratio for advanced countries measured by the Bank for International Settlements (BIS) averaging 81 percent last year, up 4.9 percentage points from 76.1 percent in 2008.
The ratio of household debt to disposable income, an indicator of households' ability to repay debts, stood at 181.1 percent as of March, up 18 percentage points from a year earlier.
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