"Stricter Loan Regulations to Be Introduced Next Month"…Cautious Approach on Jeonse Fund Restrictions

DSR Gradual Regulation Schedule Accelerated, Strengthening Secondary Financial Sector from 60% to 40% Likely

[Asia Economy Reporter Kwangho Lee] Financial authorities are considering advancing the schedule for the phased implementation of borrower-level total debt service ratio (DSR) regulations as an additional measure to manage household debt, and strengthening DSR regulations on the secondary financial sector. Measures to tighten margin loans at securities firms are also being discussed.

According to the financial sector on the 24th, the financial authorities plan to announce additional household debt management measures early next month.

On the 10th, Financial Services Commission Chairman Seung-beom Ko told reporters, "We are meticulously analyzing 20 to 30 detailed items in practice to prepare additional supplementary measures after Chuseok."

The most likely measure under consideration is the expansion and strengthening of DSR regulations. The DSR regulation limits the amount of mortgage and credit loans by calculating how much money a borrower pays annually in principal and interest relative to their annual income.

Previously, financial authorities announced plans to expand borrower-level DSR regulations in three phases. Since July, a DSR of 40% has been applied when borrowing for houses over 600 million KRW in all regulated areas or taking credit loans exceeding 100 million KRW. From July next year, it will apply to borrowers with total loans exceeding 200 million KRW across all financial sectors, and from July 2023, to those with total loans exceeding 100 million KRW. Secondary financial institutions such as savings banks, credit card companies, and insurance companies will be subject to a 40% DSR regulation starting July next year.

Accordingly, there is a proposal to lower the borrower-level DSR applied to the secondary financial sector (60%) to the level of the primary financial sector (40%). This is interpreted as an effort to block the balloon effect where loan demand shifts from the primary to the secondary financial sector and to curb the overall increase in household loans.

The secondary financial sector is widely used by ordinary people such as small business owners and self-employed individuals, but financial authorities believe they have no choice but to strengthen household loan regulations.

There is also a high possibility of regulating margin loans at securities firms. Margin loans are services where securities firms lend money using investors' held stocks as collateral. The interest rate is around 5-7% annually, and if the stock price of the collateral falls below a certain level, the securities firm can conduct a forced sale (margin call).

Financial authorities are currently monitoring the rapid increase in margin loans at securities firms since last year. According to the Korea Financial Investment Association, as of this date, the scale of margin loans at securities firms has increased by more than 30% compared to the previous year.

However, it is expected to be difficult to intervene in jeonse (long-term lease) deposit loans as real demand borrowers could be adversely affected.

In September, the household loan balance of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?was 701.568 trillion KRW, an increase of 31.4141 trillion KRW from the previous month. Of this, 49.38% were jeonse deposit loans.

With the autumn moving season starting after Chuseok, tightening regulations on jeonse deposit loans could trigger a jeonse crisis. Especially with the impact of the three lease laws causing jeonse prices to soar, this year's jeonse shortage is expected to be more severe than ever.

A financial authority official said, "No decisions have been made regarding regulations on jeonse deposit loans," adding, "We are considering various options."