[10·26 Debt Measures] Loan Limits to Be Halved Starting Next Year

[Asia Economy Reporter Kwangho Lee] Starting next year, if a borrower's total loan amount exceeds 200 million KRW, they will only be able to borrow up to 40% of their annual income. From July of the same year, this standard will apply even if the total loan amount exceeds just 100 million KRW. Additionally, as the loan threshold in the secondary financial sector?which generally has relatively higher limits compared to banks?also rises, it is expected to become even more difficult for low-income and vulnerable groups to borrow money from the formal financial sector.

On the 26th, the government held an emergency economic central countermeasure meeting and approved the "Strengthened Household Debt Management Plan" containing these measures. This comes just over three months after announcing the household debt management plan in April and implementing it in July.

First, the borrower-level total debt service ratio (DSR) phases 2 and 3 will be implemented earlier. The originally scheduled implementation dates of July next year and July 2023 for phases 2 and 3 will be moved up to January and July next year, respectively. Currently, even if the borrowed amount exceeds 200 million KRW, borrowers could avoid DSR regulation, but from next year, all will be subject to regulation without exception.

DSR is the ratio of the total principal and interest repayment amount of all household loans a person has to their annual income. For example, if the annual salary is 60 million KRW, loans can be taken within the repayment amount range of 24 million KRW, which is 40% of the annual income.

The number of people subject to regulation is also expected to increase significantly. When phase 2 is implemented, 13.2% of all borrowers and 51.8% of all loans will be affected; when phase 3 is implemented, 29.8% of all borrowers will fall under the influence of the 40% DSR limit. This corresponds to 77.2% of the total household loan amount.

DSR regulation by borrower will be expanded to the secondary financial sector. The existing individual DSR standard will be strengthened from 60% to 50% starting January next year. As loan thresholds rise in savings banks, mutual finance, and capital companies, concerns are growing that difficulties for self-employed individuals and vulnerable groups who mainly use the secondary financial sector will increase further.

Card loans, currently classified as other loans and excluded from regulation, will also be included, increasing the burden on multiple debtors or low-credit borrowers who roll over their debts.

Currently, when calculating DSR, loan maturities are uniformly applied as the maximum maturity, but this will be reduced to the 'average maturity' per loan. Accordingly, the maturity for unsecured loans will be lowered from the current 7 years to 5 years, and for non-housing secured loans from 10 years to 8 years.

Ko Seung-beom, Chairman of the Financial Services Commission, emphasized, "We will faithfully implement the announced measures so that next year's household debt growth rate will be stabilized at around 4-5%, close to the nominal GDP growth rate, which reflects the real economy growth rate." The household debt growth rate decreased from 5.9% in 2018 to 4.1% in 2019 but rose again to 8.0% in 2020 and 10.3% as of the second quarter of 2021.