Next Week's Additional Household Debt Measures to Be Announced... Focus on Strengthening Repayment Ability Including DSR

1st and 2nd Tier Financial Institutions Announce Comprehensive Strengthening of DSR
Jeonse Loan Regulations Reversed

Financial Services Commission Chairman Ko Seung-beom attended the National Assembly's inspection of the Financial Services Commission held by the National Assembly's Political Affairs Committee on the 21st and responded to lawmakers' questions. Photo by Yoon Dong-joo doso7@

[Asia Economy Reporter Jin-ho Kim] Financial authorities are expected to announce additional measures on household debt as early as the 26th.

According to the financial sector on the 23rd, the Financial Services Commission plans to announce additional measures on household debt next week after inter-agency consultations. A financial authority official explained, "We are in the final stages of coordinating the detailed plans for household debt management, aiming for an announcement on the 26th."

The core of the additional measures is likely to be the evaluation of repayment ability, as previously announced. Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki stated at the National Assembly's Planning and Finance Committee hearing on the 20th, "The supplementary measures on household debt are in the final review stage," adding, "Overall, it will involve total volume management and strengthening of DSR regulations."

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

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

In particular, to prevent a balloon effect in the secondary financial sector, it is expected that the DSR 40% will be uniformly applied to both primary and secondary financial sectors. The financial authorities' fundamental stance is not to tolerate the recent surge in household debt through secondary financial institutions such as card loans and savings banks.

However, to protect genuine borrowers, DSR will not be applied to jeonse loans. Financial Services Commission Chairman Ko Seung-beom said on the 21st, "The additional household debt measures to be announced next week will not apply the DSR regulation to jeonse loans."

Jeonse loans are currently in a blind spot of the DSR regulation. Although the recent surge in jeonse loans has been pointed out as another trigger for household debt, the application of DSR regulation to jeonse loans was strongly considered, but Chairman Ko made it clear that it will not be included in this measure. This is interpreted as a response to political and financial sector concerns about potential harm to genuine borrowers.

Additionally, the Financial Services Commission, Financial Supervisory Service, Korea Federation of Banks, and commercial banks recently agreed through a task force (TF) meeting to ensure that there are no issues with balance payments loans for about 110 apartment projects. The purpose is to prevent cases where residents cannot move in due to failure to pay the balance caused by suspension of balance payment loans under total volume regulations.

The financial authorities plan to have banks with relatively more lending capacity provide funds to banks with shortages to prevent problems in group loans.