You are here

South Korea banks to strengthen guidelines on loans to slow debt growth

[SEOUL] South Korean banks will tighten guidelines next year when screening applicants for loans, the country's top financial regulator said on Monday, stepping up efforts by policymakers to rein in snowballing household debt in Asia's fourth-largest economy.

The Financial Services Commission's (FSC) guidelines will require banks to more closely assess households' ability to payback loans fully, moving away from the current focus on whether borrowers can pay back interest.

Banks nationwide will start calculating borrowing limits for applicants by assuming higher rates ahead to reflect US Federal Reserve's pending rate hike, the guidelines said.

The new guidelines will be enforced starting Feb 1 next year for banks located in the Seoul and metropolitan areas around it and May 2 for the rest.

There will be increased scrutiny on debt applicants who live outside Seoul and the surrounding metropolitan area currently not subject to debt-to-income ratio when borrowing money. They will be asked to provide more data on their regular income and or spending, like credit card data and insurance payments.

Banks will also aim to have borrowers amortise their loans at fixed-rates, in line with regulations enforced from last year to help borrowers steer away from non-amortised loans with floating rates.

The guidelines were formed by a joint taskforce with officials from a number of institutions including the Bank of Korea, the finance ministry as well as the country's federation of banks.

Policymakers worry higher rates in the United States could eventually filter into higher borrowing costs at home and hurt households, especially as household debt has been rising at a swift pace compared to previous years due to record-low interest rates. The current base rate is at 1.50 per cent.

Credit owed by households rose 10.4 per cent this year as of end-September compared to last year, much higher than 6.5 per cent last year and 5.7 per cent in 2013, according to data from the Bank of Korea.

South Korean households' debt-to-disposable-income ratio was 163.8 per cent at end-2012, well above the Organisation for Economic Co-operation and Development (OECD) average of 134.8 per cent.

All of the roughly 7,300 banks belonging to 16 chains in South Korea will be required to update their screening process although banks can be flexible in the implementation of the rules, according to a FSC official.

The FSC said it will maintain the current loan-to-value and debt-to-income ratios.