[10·26 Debt Measures] Financial Authorities Say It's Okay Despite Lower Limits... Ordinary People May Be Pushed Out Even from Secondary Financial Institutions (Comprehensive)

Comprehensive DSR Regulations...Significant Reduction in Loan Amounts Available to Low-Income Groups
Financial Authorities, "Considering Additional Loans if Household Debt Is Not Controlled"
Ko Seung-beom "No Concerns of Harm to Ordinary People Despite DSR Regulations"...Financial Sector Worries About Side Effects

[Asia Economy Reporters Sunmi Park, Jinho Kim] Jeon Juwon (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 possible mortgage loan amount is 160 million KRW. Currently, Jeon is not subject to the borrower-based total debt service ratio (DSR) regulation. Applying the loan-to-value ratio (LTV) of 50% for regulated areas, a loan of 300 million KRW is possible. However, due to the early implementation of the borrower-based DSR phase 2 in January next year, he falls under the DSR 40% application target. As a result, Jeon's mortgage loan limit is reduced to 160 million KRW. This is because, as a DSR 40% subject, he can only borrow within the principal and interest repayment amount corresponding to 40% of his annual income, which is 20 million KRW.

The core of the additional household debt management plan announced by financial authorities on the 26th is to move away from collateral- and guarantee-based lending practices and lend only to those who have the ability to repay. Previously, collateral loans could reach hundreds of millions of KRW based on the value of collateral such as apartments, even if the borrower's income was low. From next year, however, the loan limit will vary according to annual income, regardless of the quality of collateral. 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 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 DSR phase 2 (total loans exceeding 200 million KRW) and phase 3 (total loans exceeding 100 million KRW), originally scheduled for July next year, to January and July next year, respectively. The current system, which allowed borrowing hundreds of millions 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 phases 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 obtain unsecured loans. Currently, borrowers with loans exceeding 200 million KRW may not be subject to DSR regulations, but from next year, limits will be determined based on annual income.

Under strengthened loan regulations, unsecured loans will be more advantageous when repaid in installments rather than lump-sum. For example, a borrower with an annual income of 80 million KRW currently using a 150 million KRW mortgage loan (10-year term, 2.8% interest) who applies for a new unsecured loan of 60 million KRW (3.5% interest) in January next year will be blocked by the DSR 40% regulation if the unsecured loan is lump-sum (5 years), making the loan impossible. However, if applying for an installment unsecured loan (8 years), the annual principal and interest repayment will be 19 million KRW for the mortgage and 10 million KRW for the unsecured loan, totaling 29 million KRW, corresponding to a DSR of 36.3%, allowing the loan.

From January next year, the DSR standard for secondary financial institutions, mainly used by low-income and vulnerable groups, will be strengthened from 60% to 50%. This inevitably means greater damage to relatively low-income citizens. Notably, card loans, which were previously exempt from regulation, will now be included. For example, a borrower with an annual income of 40 million KRW using a non-regulated area mortgage loan of 180 million KRW (2.5% annual interest) and an unsecured loan of 25 million KRW (3.0% annual interest) will see their card loan limit reduced by about 25%, from 8 million KRW to 6 million KRW (13% annual interest, 2-year term, equal principal repayment) when using card loans for emergency funds.

Additionally, as the loan calculation maturity is shortened when calculating DSR, the borrower's principal and interest repayment burden increases. As the repayment burden rises, the limit on additional borrowing decreases accordingly.

◆Strengthening protection for genuine borrowers but activating ‘Plan B’ if management fails=Although the household loan 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 loans (key money deposit 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 this. If a borrower needs funds for genuine reasons such as marriage, funerals, or surgery, temporary exceptions allowing exceeding limits will be applied when unsecured loans are limited to one times annual income.

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

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

◆Ko Seung-beom: "No harm to ordinary citizens despite strengthened DSR regulations"=Ko Seung-beom, Chairman of the Financial Services Commission, stated regarding the additional household debt measures focusing on strengthening borrower-based DSR regulations, "There will be no harm to ordinary citizens and vulnerable groups." After the 6th Financial Day ceremony held at Post Tower in Jung-gu, Seoul, Ko told reporters, "Even if borrower-based DSR regulations are advanced, the proportion of borrowers subject to these regulations is not high, so there should be no significant problems for ordinary citizens and vulnerable groups in accessing loans."

This can be interpreted as a rebuttal to market concerns that strengthening borrower-based DSR regulations will make it more difficult for ordinary citizens and vulnerable groups to access loans. According to the Financial Services Commission, borrowers with total loans exceeding 200 million KRW, subject to borrower-based DSR phase 2, account for 13.2% of all borrowers, and those exceeding 100 million KRW, subject to phase 3, account for 29.8%. Since these groups represent less than 30% of all borrowers, the financial authorities analyze that the likelihood of ordinary citizens being severely affected is low.

However, contrary to Chairman Ko’s remarks, the additional measures include a significant strengthening of the DSR standard for secondary financial institutions, mainly used by low-income and vulnerable groups, from January next year. This ultimately means that loan limits for low-income citizens will inevitably decrease across all financial sectors. A financial industry insider commented, "The strengthening of DSR regulations overlooks the fact that low-income citizens’ loan limits will be reduced much more than those of high-income earners. Loan regulations tightening both primary and secondary financial sectors simultaneously will eventually push ordinary citizens toward illegal private loans," criticizing the policy.