[10·26 Debt Measures Q&A]② Secondary Finance DSR 50%... Will There Be No Balloon Effect?

[Asia Economy Reporter Song Seung-seop] The implementation date for the second phase of the borrower-level Debt Service Ratio (DSR) has been moved up to January 2022 from the original schedule. Measures to strengthen management of the secondary financial sector, including mutual finance institutions and card loans, have also been included. Despite concerns about a balloon effect, the DSR regulatory ratio will remain at 50%, which is 10 percentage points higher than that of commercial banks. The changes in loan limits for the secondary financial sector and the direction of next year's jeonse loan regulations are summarized in a Q&A format.

Q. Why is the borrower-level DSR regulatory ratio for the secondary financial sector (50%) still higher than that of banks (40%)?

A. The secondary financial sector differs from banks in terms of the types and proportions of loans handled. Additionally, there are differences in the characteristics of borrowers using these sectors, the nature of collateral, and income verification. Therefore, when applying the DSR, the regulatory ratio gap is partially maintained considering the significant differences in DSR variance of existing loans compared to banks. However, efforts will be made to minimize the balloon effect by simultaneously strengthening the average DSR standards for the secondary financial sector and tightening the loan-to-deposit ratio for mutual finance institutions.

Q. Why is there a distinction between members and non-members when applying the loan-to-deposit ratio in mutual finance institutions?

A. The difference in loan-to-deposit ratios between members and non-members is intended to promote relational finance and restore the identity of mutual finance institutions. Mutual finance institutions were established for mutual aid among local members. However, recently, loans to non-members have surged, reaching 154.8 trillion KRW (36.1% of the total) as of the first half of this year. This is because some cooperatives' loans to non-members or quasi-members were not subject to the 'non-member loan limit.' There have also been cases where non-members or quasi-members used these loans as real estate investment funds to purchase farmland and other properties.

Q. Why was card loan, frequently used by low-income people, included in the borrower-level DSR?

A. In principle, all loans related to the borrower's repayment burden need to be included. Previously, card loans were excluded considering the potential credit contraction for low-income and low-credit borrowers. However, given the recent rapid increase, there is a significant risk that defaults among vulnerable borrowers could become widespread and severe. Especially, as card loans among multiple debtors are increasing, there is a need to strengthen management.

Q. How much does including card loans (long-term card loans) in the borrower-level DSR reduce the possible loan amount?

A. It varies depending on detailed conditions such as the borrower's income level, so it is difficult to calculate uniformly. Assuming a borrower with an annual income of 40 million KRW applies for a card loan of 8 million KRW (13% annual interest, 2-year maturity, equal principal repayment), previously, the loan amount was determined through the financial institution's own credit screening. However, under the DSR 50% limit, the loan can only be handled within that ratio. If the borrower already has a mortgage loan of 180 million KRW (2.5% annual interest) and a credit loan of 25 million KRW (3.0% annual interest), the loan limit for the card loan would decrease from 8 million KRW to 6.36 million KRW.

Q. Will jeonse loans continue to be excluded from total volume management next year as they are now?

A. Jeonse loans could be used as a means to facilitate gap investment, so active management is necessary. However, this year, due to high market concerns about a complete halt on jeonse loans during household debt total volume management, they were exceptionally excluded. Financial institutions plan to include jeonse loans in the total volume management when establishing household loan handling plans for next year, as in previous years.

Q. Will the recently strengthened jeonse loan screening regulations be maintained next year?

A. The recently strengthened jeonse loan screening standards decided by banks were voluntary measures taken to selectively restrict unnecessary jeonse loans and ensure continuous supply to low-income and genuine demand borrowers. In principle, these screening standards will apply until the end of this year, when jeonse loans are excluded from total volume regulation. However, depending on next year's jeonse loan handling situation, screening intensification and other measures may be resumed at any time.