Half of Personal Loan Borrowers Are Grade 1... Authorities Tighten Regulations to Curb 'Debt Investment'

False Financial Regulations Cause Loan Cliff for Common People
Rising Bank Barriers May Push Citizens to the Edge

[Asia Economy Reporter Kangwook Cho] It has been revealed that half of the people who took out bank unsecured loans have a credit rating of 1. Eight out of ten borrowers were rated 3 or higher. Accordingly, there are concerns that financial authorities, alarmed by the craze for 'Youngkkeul (borrowing to the limit)' and 'Debt Investment (borrowing to invest),' may have rushed into tightening regulations without properly understanding the market situation. In particular, there are worries that the plan to limit the total amount of unsecured loans at banks through a 'memorandum' and to strengthen the Debt Service Ratio (DSR) regulations could push self-employed individuals and ordinary citizens who want to borrow living expenses into a 'loan cliff.'

According to the 'Recent 5-Year Distribution of Bank Loan Customers' Credit Ratings' received by Yoon Doo-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, from NICE Information Service on the 19th, among the 6.46 million customers using unsecured loans as of the end of September, 3.11 million (48%) were rated 1. Grade 2 accounted for 17%, and grade 3 accounted for 13%. Nearly 80% of those who used bank unsecured loans were high-credit borrowers with grades 1 to 3. In particular, the proportion of grade 1 (as of the end of September) steadily increased from 40% in 2016 to 43% in 2017, 44% in 2018, 46% in 2019, and 48% in 2020. It rose by 8 percentage points over four years.

Typically, the biggest factor affecting credit ratings is whether interest payments are made on time without delinquency. An increase in credit rating is interpreted as meaning that interest was repaid promptly. However, Yoon pointed out that the financial authorities' crackdown on unsecured loans means that regulations have been imposed not only on high-credit borrowers but also on the entire bank customer base, including medium and low credit borrowers.

In fact, 18 domestic banks submitted plans to the Financial Supervisory Service to keep the monthly increase in unsecured loans at around 2 trillion won until the end of this year. They effectively signed a 'memorandum' fixing the increase target for October to December at 'around 2 trillion won.'

The financial authorities also announced plans to expand DSR regulations. DSR is the ratio of the total principal and interest of all loans a borrower must repay to their annual income. Currently, a DSR of 40% is applied when borrowing against a house worth more than 900 million won in speculative or overheated speculative areas. The authorities are reportedly considering expanding the areas where DSR is applied per borrower or lowering the house price criteria to broaden the scope of regulation. Strengthening DSR regulations will affect most household loans, including mortgage loans, unsecured loans, and jeonse (key money deposit) loans.

The problem is that with the total loan amount limited and preferential interest rates disappearing, the overall threshold for bank loans has risen. According to the Bank of Korea's Financial Institution Loan Attitude Survey, the loan attitude index for general household loans changed from 9 in the third quarter to -9 in the fourth quarter of this year. This means banks will scrutinize loans more strictly in the fourth quarter. The interest rates on unsecured loans at major banks, which had been steadily declining this year, reversed to an upward trend last month. If DSR is tightened, loan supply will decrease, causing interest rates to rise further, raising concerns that vulnerable groups may face greater difficulties. In particular, there are concerns that low-income individuals, low-credit borrowers, and elderly people without pension income may be unable to get loans from banks and be pushed to secondary financial institutions.

A financial industry official said, "While it is true that managing household debt risk is necessary if unsecured loans with high default risk surge, limiting the total amount of unsecured loans in the current prolonged COVID-19 situation could sever the lifeline of ordinary people who really need loans," adding, "Rather than forcibly reducing banks' unsecured loan limits, it is urgent to continuously ease anxiety about housing shortages and other concerns."