Regulator tightens restrictions on bank loans to fight household debt

South Korean financial authorities have called on local banks to tighten their screening of unsecured loans as part of efforts to deal with rising household debt, sources said Thursday.

The Financial Supervisory Service (FSS) recently asked all commercial lenders to submit their plans to adjust credit loan limits to individual borrowers by Friday.

Banks have drawn up or are in the process of drawing up plans to reduce the ceilings on unsecured loans, according to the sources.

Nonghyup Bank, the flagship banking arm of NH Financial Group Inc., said on Tuesday that the limit on individual credit loans should be lowered to 100 million won ($ 85,700) or less from 200 million won.

The limit on new unsecured loans will be reduced to 100% of the borrower’s annual income.

Following Nonghyup Bank’s move, KB Kookmin, Hana and other commercial lenders are set to follow suit, leading internet-only lender Kakao Bank is expected to take a similar step, the sources said.

The FSS’s latest move comes after it called on a meeting of bank lending leaders to call on lenders to lower their unsecured loan ceilings to the level of borrowers’ annual income.

Local financial authorities are giving top priority to limiting a sustained rise in household debt, which some experts say is a time bomb for Asia’s fourth-largest economy.

Credit to South Korean households hit an all-time high of 1.765 trillion won ($ 1.5 trillion) at the end of March, up 9.5 percent from a year earlier, according to bank data central.

In April this year, the Financial Services Commission (FSC), the decision-making body of the FSS, announced a series of measures to slow the growth of household debt by extending stricter rules to more borrowers. mortgage.

In line with the measures, the FSC announced on Thursday that it would review the rules for unsecured loans from savings banks and other non-bank financial institutions.

Under revised rules expected to come into effect in July next year, these financial institutions would be required to build more loss reserves for individual borrower lines of credit.

Industry analysts have said that the tightening of loan loss reserve requirements could lead to lower income and thus prompt non-bank financial institutions to impose tighter restrictions on unsecured lending. (Yonhap)