[Inside Chodong] Patchwork Approach to Household Loan Management

Damage to Genuine Borrowers
Amidst Fluctuating and Uncoordinated Policies

[Asia Economy Reporter Park Sun-mi] At last week’s National Assembly Political Affairs Committee audit, lawmakers sharply criticized the government and financial authorities for their failure to manage household loans.

Despite the banking sector exceeding the household loan total volume management targets for several years, the financial authorities recognized the seriousness of the increase in household debt but failed to take any restraining measures. The recent hurried and stringent tightening of loans by banks in the second half of this year, which has sparked backlash from genuine borrowers, was pointed out as a problem stemming from the financial authorities’ lack of a planned approach to managing household debt.

As genuine borrowers who could not secure jeonse funds voiced their complaints amid the banking sector’s chain reaction of tightening total loan volume regulations, the government and financial authorities changed their plan to ease restrictions specifically on jeonse loans. Financial Services Commission Chairman Ko Seung-beom, who had maintained a tough stance on household debt management, backtracked from his earlier declaration to “use all means to curb household debt,” recently stating, “We plan to respond flexibly in managing the total volume of jeonse loans in the fourth quarter of this year to ensure that genuine borrowers do not face interruptions in accessing jeonse loans.”

The household loan growth target, initially set to be managed within an annual range of 5-6%, has also been relaxed to about 6.99%. This change came after the household debt growth rate of the five major banks approached the target range of 5% last month, prompting a decision to allow a bit more leeway on the upper limit.

While the easing of loan access for genuine borrowers amid a surge in loan refugees is welcome, the financial authorities’ approach?abruptly tightening loans without calculating side effects and then hastily applying patchwork fixes in response to worsening public opinion?has drawn resentment from genuine borrowers.

In reality, as banks reduced loan limits and even suspended jeonse loans, some genuine borrowers who could not secure funds had no choice but to switch from jeonse to monthly rent or resort to second-tier financial institution loans with higher interest rates. Even though bank jeonse loans were later resumed, there is no way to compensate those genuine borrowers who suffered losses in the meantime.

The financial authorities’ household debt management policy has already been evaluated as a failure, described with terms such as “constantly changing policies,” “lack of clear direction,” and “questionable effectiveness.” The focus on the speed of policy announcements has been criticized for overlooking the many side effects that a single policy can cause. Some argue that the patchwork measures introduced to appease public opinion may cause even greater side effects, and that the current policies are only temporary and could change again after next year’s presidential election.

To curb the rapidly increasing household loans, it is essential first to control the environment that inevitably leads to borrowing. If the loan windows are simply closed while the need for money remains unchanged, the burden will fall entirely on genuine borrowers. It is a more important time to gradually and stepwise tighten loans while carefully monitoring surrounding conditions so that genuine borrowers can engage in economic activities without excessive borrowing.

Not all flowers take root in barren soil like dandelions. It is difficult for new sprouts to emerge in dry land. We hope that the government and financial authorities will play the role of selecting the barren soil well and watering it so that the sprouts of hope can grow in our economy.