[10·26 Debt Measures] Further Limit Reduction... Increasing Number of Low-Income People Unable to Borrow Even from Secondary Financial Institutions

Loan Amounts for Low-Income Groups Significantly Reduced
Even High-Income Earners Face Challenges with Credit Loans
If Household Debt Is Not Controlled, Further DSR Ratio Adjustments Expected

[Asia Economy Reporters Sunmi Park, Jinho Kim] Jeon Ju-won (43, pseudonym), an office worker with an annual income of 50 million KRW and an existing unsecured loan of 50 million KRW (interest rate 4.5%), plans to apply for a mortgage loan (30 years, interest rate 3.5%) to purchase a 600 million KRW house in January next year. The available mortgage loan amount is 160 million KRW. Currently, Jeon is not subject to the borrower-level total debt service ratio (DSR) regulation. Applying the loan-to-value (LTV) ratio of 50% for housing in regulated areas, a loan of 300 million KRW would be possible. However, due to the early implementation of the second stage of borrower-level DSR in January next year, Jeon falls under the DSR 40% application category. As a result, the mortgage loan limit Jeon can receive is reduced to 160 million KRW. This is because, as a DSR 40% subject, Jeon can only borrow within the principal and interest repayment amount corresponding to 40% of his annual income of 50 million KRW, which is 20 million KRW.

The core of the additional household debt management measures announced by financial authorities on the 26th is to move away from the practice of collateral- or guarantee-based lending and provide loans only to those who have the ability to repay. Previously, collateral loans allowed borrowers to receive loans worth hundreds of millions of KRW based on the value of collateral such as apartments, even if their income was low. However, from next year, loan limits will vary according to annual income, even if the collateral is good. The number of borrowers subject to individual DSR will increase significantly, and loan limits will be drastically reduced, making it more difficult to borrow money from the formal financial sector.

◆ Loan limits to be halved from next year = Since July, the government has applied a 40% DSR limit for bank loans and 60% for secondary financial institutions when obtaining mortgage loans for houses over 600 million KRW in regulated areas or unsecured loans exceeding 100 million KRW. Despite this, household loan growth did not slow, so the government decided to advance the implementation of the second stage (total loan amount exceeding 200 million KRW) and third stage (total loan amount exceeding 100 million KRW) of DSR, originally scheduled for July next year, to January and July next year. The current system, which allowed loans worth hundreds of millions of KRW based solely on good collateral, will be replaced by a system that calculates total loan amounts and restricts borrowing based on repayment ability.

With the early implementation of DSR regulation stages 2 and 3, loan amounts will be significantly reduced primarily for low-income borrowers rather than high-income earners. Even high-income earners will find it difficult to borrow unsecured loans. Currently, borrowers with loans exceeding 200 million KRW may not be subject to DSR regulation, but from next year, loan limits will be determined based on annual income.

The DSR standard for secondary financial institutions, mainly used by low-income and vulnerable groups, will also be lowered from 60% to 50% starting January next year. This will inevitably cause greater harm to low-income citizens. Notably, card loans, which were previously exempt from regulation, will now be included. Additionally, the loan calculation maturity period for DSR will be shortened, increasing borrowers' principal and interest repayment burdens. As repayment burdens increase, the amount of additional borrowing will decrease accordingly.

◆ Strengthening protection for genuine borrowers but activating ‘Plan B’ if management fails = Although the household debt management plan reduces overall loan limits and increases repayment burdens, exceptions will be made for low-income and genuine borrowers.

Until the end of the year, jeonse (long-term lease) loans will be excluded from the total household loan volume management limit to allow genuine jeonse loans. To prevent situations where group loans for pre-sold apartments are blocked, financial authorities plan to form a task force (TF) to manage the issue. If unsecured loan limits based on annual income are exceeded due to genuine needs such as marriage, funerals, or surgery, temporary exceptions allowing limit exceedance for a certain period will be applied.

If the announced measures fail to curb household debt growth, financial authorities will activate ‘Plan B.’ This includes further adjustments to DSR ratios and expanding the scope of application, restricting borrowing for more borrowers. Jeonse loan borrowers, who were excluded this time, may also become subject to DSR regulation.

The financial authorities’ target for next year’s household debt growth rate is ‘4-5%.’ Considering that this year’s rate is expected to be around 7% and there was already a ‘loan crisis,’ it means that borrowing conditions for ordinary citizens will worsen next year. With strengthened financial supervision, financial institutions will be required to report household debt management plans to executives, risk management committees, and boards of directors, leading to tighter loan management.