Additional Measures on Household Debt to Be Announced Next Week... What Will They Include?

Core of 'Repayment Ability Assessment'... High-Intensity Regulations Expected Including DSR Strengthening

Ko Seung-beom, Chairman of the Financial Services Commission, is delivering a congratulatory speech at the opening ceremony of the investor education platform 'R2 Plus' held at the Korea Financial Investment Association in Yeouido, Seoul on the 14th. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Kim Jin-ho] Additional measures to curb household debt, the biggest risk factor for the Korean economy, will be announced next week. The core of the additional measures is expected to focus on strengthening the effective management of the Debt Service Ratio (DSR). The financial authorities’ firm stance is to "allow borrowing only as much as one earns." However, some relief is expected for essential loans such as jeonse loans, which have been at the center of controversy.

According to financial authorities and the financial sector on the 16th, the 'additional household debt measures' are expected to be announced next week. The most likely date is the 22nd, following the comprehensive inspection of the financial sector by the National Assembly’s Political Affairs Committee on the 21st.

The additional loan regulation scenario, centered on assessing repayment ability, includes three main points: ▲early expansion of DSR regulation ▲regulation of jeonse loans ▲blocking the balloon effect in the secondary financial sector. On the 14th, Financial Services Commission Chairman Ko Seung-beom also told reporters, "The additional measures will mainly focus on strengthening the effective management of the Debt Service Ratio (DSR), jeonse loans, and loans in the secondary financial sector," adding, "It will also comprehensively include financial companies’ household debt management plans and measures to protect genuine borrowers."

The early introduction of DSR is certain. Initially, the Financial Services Commission planned to introduce the 40% DSR regulation in three phases. The 40% DSR limits the repayment of loan principal and interest to within 40% of annual income.

Currently, the DSR regulation is preemptively applied to mortgage loans for homes priced over 600 million KRW in regulated areas and to credit loans exceeding 100 million KRW. The plan was to expand the scope to total loans exceeding 200 million KRW in July next year (phase 2) and 100 million KRW in July 2023 (phase 3), but advancing this schedule is under consideration. This is because household debt shows no signs of slowing down despite the phase 1 DSR application. In fact, from July to September, after phase 1 DSR was applied, the increase in household loans at the five major commercial banks reached about 14 trillion KRW.

Regulations on the recently surged jeonse loans are also expected. However, since these are essential loans, the tightening is likely to be moderated rather than the comprehensive clampdown initially announced. Chairman Ko stated, "We will protect genuine borrowers so that jeonse loans are not stopped," and added, "We are willing to tolerate the household loan growth rate exceeding the target of the mid-6% range due to the increase in jeonse loans." He further said, "Specific measures to protect genuine borrowers will be explained when the additional household debt measures are announced."

Currently, the financial sector expects that regulations on jeonse loans will limit the loan amount for those renewing existing contracts to within the increase in the deposit amount. Until now, it was possible to borrow up to 80% of the total deposit for jeonse loans, but going forward, loans will only be possible for the increased portion.

Including jeonse loans in the DSR calculation is also being discussed. Currently, jeonse loans are excluded from DSR calculations, but applying this would reduce loan limits. A 'partial installment repayment method' for jeonse loans, which repay both interest and principal, is also expected to be considered.

Early application of DSR to card loans (long-term card loans) is also one of the likely scenarios. This measure is intended to address concerns about the ‘balloon effect’ occurring mainly in the secondary financial sector due to comprehensive tightening on banks. Currently, the DSR limit per borrower is 40% for banks and 60% for non-bank financial institutions, but card loans have been exempted until July next year.