[Opinion] Early Implementation of DSR for Household Loan Restrictions and Card Loans

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University

Recently, due to the rapid increase in household debt, financial authorities are tightening loan regulations across the board. These measures include limiting unsecured loan ceilings to 100% of annual income, implementing a total loan volume cap within 5-6%, and the possibility of early enforcement of borrower-specific DSR (Debt Service Ratio) for credit card companies. In the second quarter of this year, household loans surpassed 1,700 trillion won, marking a 10.3% increase compared to the same period last year. Financial authorities regulate that borrower-specific DSR should not exceed 40% for unsecured loans over 100 million won in the banking sector and mortgage loans over 600 million won in regulated areas. However, they believe it is necessary to curb the rising trend of loans in the secondary financial sector as a balloon effect caused by banking sector loan regulations. Unlike banks, the secondary financial sector is subject to a borrower-specific DSR of 60%, but the same regulation for card loans has been deferred until July next year. Consequently, financial authorities are considering the early implementation of DSR regulations on card loans, which are relatively loosely regulated among the secondary financial sector.

The recent increase in card loans has been steep. As of the first quarter of this year, the card loan balances of seven specialized card companies increased by 9.5% compared to the same period last year. The surge in card loans is presumed to be due not only to low-credit borrowers in urgent need of funds but also to mid-credit borrowers who were rejected by banks and are obtaining loans using multiple cards. However, a sudden tightening of loan regulations on card loans is likely to cause several side effects as follows.

First, it may trigger a chain reaction of loan defaults. Due to the nature of card loans, where multiple borrowers take loans from several card companies, tightening card loan regulations could make it difficult for borrowers to repay principal and interest, negatively affecting the soundness of many card companies.

Second, the living conditions of livelihood-type borrowers may worsen. A significant portion of card loan users are in their 50s and 60s. For those aged 50 and above, the main purpose of loans is securing funds for livelihood activities such as starting a business rather than purchasing a home. Considering that a large portion of financial sector loans to self-employed individuals target those aged 50 and above, card loan regulations effectively restrict support for livelihood funds.

Third, there is concern about the inflow of low-credit borrowers into private loans. Card loans carry an average interest rate of around 15-16%, making them practically the last financial means available within the formal financial system. This is because, due to the reduction of the legal maximum interest rate, loans from private lenders charging over 20% interest are not an option. Card companies focus their card loan business on high-credit borrowers and may exclude low-credit borrowers from their target market. Strengthening card loan regulations could increase demand for private loans among low-credit borrowers despite the high interest burden.

Fourth, the interest burden on card loan users may increase due to rising card loan interest rates. Card loan regulations could lead to higher loan interest rates for high-credit borrowers using card loans. This is because reducing loans to low-credit borrowers, who typically have higher loan margins, may prompt card companies to raise interest rates for high-credit borrowers.

In conclusion, card loans are the last resort of consumer finance used for livelihood purposes. Early enforcement of DSR regulations on card loans may help suppress household loans to some extent, but the side effects are not insignificant. Careful policy implementation by financial authorities is deemed necessary.

Seo Ji-yong, Professor, Department of Business Administration, Sangmyung University