Commercial Banks Tighten Credit Loans...Significantly Reduce Limits on 'Dormant Overdraft Accounts'

Financial Authorities Order Loan Speed Control
Banks Prepare Plans to Reduce Total Loan Volume
Partial Repayment Encouraged for Loan Maturity Extensions
KakaoBank Opens Rate Hike with 0.15%P Increase Today

[Asia Economy Reporters Kangwook Cho, Minyoung Kim] A plan is being promoted to significantly reduce the unused credit limit when extending the maturity of overdraft accounts (limit loans). In addition, not only will the screening for credit loan maturity extensions be strengthened, but measures to reduce the credit limit are also being considered. This is in response to financial authorities requiring banks to independently review the status of credit loans and submit plans to reduce the total loan volume.

According to the financial sector on the 25th, commercial banks are expected to submit such loan volume reduction plans to the Financial Supervisory Service (FSS) on the same day. Earlier, the FSS requested commercial banks to report the outstanding household loans by loan category until August, monthly household loan balance plans until December, credit loan limit calculation plans, maximum limit per borrower, and limit calculation methods for refinancing loans from other banks by this day.

An official from Bank A said, "We are submitting the current status and plans for overall household loans until the end of this year," adding, "There has been no such semi-annual or quarterly loan status reporting until now."

Significant Reduction of Loan Limits for Unused Overdraft Accounts upon Maturity Extension

Banks plan to introduce a measure that significantly reduces the loan limit when extending the maturity of overdraft accounts that have been opened but not used. For example, if a borrower has an overdraft limit of 100 million KRW but has only used 50 million KRW in the past year, about half of the remaining 50 million KRW limit will be cut upon maturity extension.

Recently, as financial authorities announced plans to regulate credit loans, there was a surge in last-minute demand to open overdraft accounts before the regulations took effect. From the 14th to the 17th, the new overdraft contract amount at the five major commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?approached 800 billion KRW, increasing by nearly 70% within a week. However, the financial authorities emphasize that attention should also be paid to the maturity extensions of credit loans as much as to new loan issuance. While it may not be possible to reduce the limit by half as with new loans, measures to reduce the limit each time the maturity is extended should be considered.

An official from Bank B said, "We are reviewing measures to reduce non-face-to-face loan limits, overdraft limits for professionals and high-income earners, and credit loan limits," explaining, "Since most overdraft accounts eventually use the full limit, simply reducing the remaining limit can help control the increase in credit loans."

Stricter Screening for Credit Loan Maturity Extensions

The screening process for credit loan maturity extensions is also expected to become stricter. The plan is to reduce the borrower's loan limit and encourage partial repayment through this process. Typically, credit loan maturity extensions occur on a one-year basis. Since the loan is renewed, the limit can be adjusted like a new loan, but banks have traditionally treated it as an ongoing loan and did not reduce the limit. Maturity extensions could be easily done via phone calls or mobile applications, and if the borrower had no particular issues, the limit was maintained.

There is also a possibility that interest rate adjustments for new credit loans will be made soon. Internet bank KakaoBank opened the door by raising the minimum interest rate for salaried worker credit loans from 2.01% to 2.16%, an increase of 0.15 percentage points. An official from Bank C said, "We are considering adjusting preferential interest rates, reducing benefits for subscription savings accounts, and scaling back preferential treatment for main transaction customers."

Credit Loan Reduction Measures to be Implemented after the Chuseok Holiday

Financial authorities plan to review the loan reduction measures submitted by banks, supplement some parts, and provide guidelines. These credit loan reduction measures are expected to be implemented after the Chuseok holiday.

A financial sector official said, "After Chuseok, we are internally reviewing adjustments to preferential interest rates based on salary transfers, savings subscriptions, and card usage performance."