Financial Services Commission Nears Announcement of 'Household Debt Management Plan'... Deliberates on Loan Easing Measures for Youth

Financial Services Commission to Announce 'Household Debt Management Measures' in Mid-Month
Reviewing Loan Regulation Easing for Youth and Genuine Borrowers
"Excessive Easing Could Signal Stimulus to Real Estate," Warns Official

[Asia Economy Reporter Song Seung-seop] Financial authorities are deliberating over the upcoming “Household Debt Management Plan” scheduled to be announced next week. While there is a need to tighten the rapidly increasing household debt, voices are growing to ease loans for young people and genuine borrowers.

According to the financial sector on the 17th, the Financial Services Commission plans to announce the household debt management plan by April at the latest. This is because household debt has reached 100% of the Gross Domestic Product (GDP) and the growth rate has also accelerated.

According to data from the Korea Institute of Public Finance titled “Trends and Comparisons of Total Debt and Sectoral Debt by Country,” Korea’s household debt to GDP ratio was 98.6% in the second quarter of last year. This exceeds the global average of 63.7% and the advanced countries’ average of 75.3%. The household debt growth rate, which was around 4-5% before COVID-19, surged to 8% last year.

Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki also attended the National Assembly Budget and Accounts Committee last month and stated, “Household loans increased to overcome the COVID-19 crisis,” adding, “We plan to separately announce the household debt management plan as early as the end of March.”

The Financial Services Commission is considering switching the Debt Service Ratio (DSR) to be applied on a borrower-by-borrower basis. Currently, the DSR is managed as an average indicator (40%). Banks have only needed to meet the average, so loans exceeding 40% DSR have been extended to borrowers with repayment ability. If all borrowers are subject to the same DSR regulation, the total debt amount is likely to decrease. The goal is to reduce the debt growth rate to around 4% through this measure.

Some point out that the DSR regulation could harm young people. Even genuine borrowers might find it difficult to secure loans due to insufficient income.

Tightening Loans Damages Housing Ladder, Easing Causes Household Debt Surge... Policy 'Dilemma'

In response, financial authorities are considering extending the maximum term of policy mortgages (housing collateral loans), currently capped at 30 years, to 40 years for young people and newlyweds, and calculating DSR by reflecting the future income of young borrowers. There are also proposals to increase the bonus points for the Total Debt to Income ratio (DTI) and Loan to Value ratio (LTV), which are granted only to low-income and genuine borrowers, from 10 percentage points to 20 percentage points or to broaden the eligibility criteria.

Within the ruling party, there are calls to ease financial regulations specifically for the homeless and young people around the April 7 by-elections. Choi In-ho, chief spokesperson of the Democratic Party of Korea, emphasized after the party’s emergency committee meeting on the 9th, “Measures for the homeless, young people, newlyweds, and workers need to be more detailed,” adding, “From the perspective of creating conditions for the homeless and young people to actually secure housing, financial regulations may be somewhat relaxed.”

This places the policy in a ‘dilemma’ of needing to tighten loans while lowering barriers for genuine borrowers. Excessive loan regulations or insufficient benefits for genuine borrowers invite criticism that the “housing ladder has been kicked away.” Conversely, too much loan easing undermines the purpose of the household debt management plan.

Easing loans for young people also risks disturbing the real estate buying sentiment, which is barely stable. According to the Financial Supervisory Service, among new housing collateral loans issued by six major commercial banks last year, 46.3% were loans to those under 40 years old. Since the easing targets young people, there is concern that the “Younggeul (borrowing to the limit)” trend centered on people in their 20s and 30s, as seen in July last year when the number of apartment purchases in Seoul by those under 30 was the highest ever, could reoccur.

An official from a commercial bank warned, “Easing regulations will definitely help young people secure their own homes,” but also cautioned, “It could send the wrong signals to the real estate market, which has been trying to control prices through regulations.”

Financial Services Commission Chairman Eun Sung-soo expressed that he is considering a compromise. At a meeting with reporters on the 9th, Chairman Eun emphasized, “Reducing household debt steadily and being flexible with loans for young people are conflicting goals,” adding, “We are at the stage of considering the appropriate balance.”