[Yoon Seok-yeol Elected] LTV and DSR Regulations to Be Tightened... Loan Restrictions to Ease

Expanding Loans Focused on Actual Demand
First-Time Homebuyers LTV 80% Pledge
Special Ultra-Low Interest Guarantees for Small Business Owners
Expanding Self-Employed Loans Beyond Current Levels

Financial Services Commission Chairman Ko Seung-beom is taking a commemorative photo with major commercial bank CEOs before the 'Financial Services Commission Chairman Invitation Bank CEOs Meeting' held at the Bankers Club of the Korea Federation of Banks in Jung-gu, Seoul, on the 28th. At the meeting, Chairman Ko and the bank CEOs discussed measures to extend the maturity and interest repayment deferral of loans for small business owners. Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Sim Nayoung] When the new government takes office, it is expected that the tight restrictions on loans will be eased to curb household debt. For Yoon Seok-yeol, the president-elect, to implement his pledge to relax real estate-related loans, he must cut the current government's loan regulation policies. This means that the ‘household loan total volume regulation,’ which limits banks' household loan growth to 4-5% year-on-year, and the ‘Debt Service Ratio (DSR) regulation,’ which restricts the principal and interest repayment amount proportional to an individual's annual income if the loan exceeds 200 million KRW, will inevitably have to be lifted.

President-elect Yoon holds the position that real estate loans should be increased focusing on actual demanders. To this end, he proposed a pledge to raise the Loan-to-Value ratio (LTV) to 80% for first-time homebuyers. Currently, the LTV in speculative areas and speculative overheating districts, including Seoul, is 40%, but raising it would increase household loans. Yoon Chang-hyun, a lawmaker who served as the financial advisor for Yoon’s campaign, said in an interview with Asia Economy at the end of last month, "Rather than tightening the Debt Service Ratio (DSR) regulation or the total household loan volume regulation, it is desirable to allow banks to make autonomous decisions on lending. Financial policy in a country cannot be made solely based on housing prices."

Loans for self-employed individuals are also expected to increase significantly compared to now. Yoon pledged to provide an additional 50 trillion KRW in ultra-low interest special guarantee loans targeting this group. This means that the Credit Guarantee Fund will provide guarantees so that self-employed individuals can borrow emergency funds from banks at low interest rates. Given that the maturity extension and principal and interest repayment deferral for small business loans have already been extended by six months, if the additional 50 trillion KRW loan pledge is implemented, the risks banks must bear will increase further.

New regulations will also be introduced. One of Yoon’s representative financial pledges is to disclose and control the banks’ net interest margin (the difference between loan interest rates and deposit interest rates), which is a major source of bank revenue. This pledge was created after banks rapidly raised loan interest rates while slowly increasing deposit interest rates during the interest rate hike starting last year, generating record profits. Related bills were also introduced in the National Assembly last month, and the Financial Supervisory Service is investigating the net interest margin. According to the Bank of Korea, banks’ net interest margin was 1.80 percentage points in January, up 0.25 percentage points from December last year. This is the largest increase since January 2013 (0.26 percentage points).

He also proposed the Youth Leap Account, modeled after the popular Youth Hope Savings. Targeting youths aged 19 to 34, four income brackets are set, and the government provides monthly support payments of 400,000 KRW (annual income below 24 million KRW), 200,000 KRW (24 million to 36 million KRW), and 100,000 KRW (36 million to 48 million KRW) according to income. Those earning over 48 million KRW receive tax-exempt benefits. For example, if a subscriber with an annual income below 24 million KRW deposits 300,000 KRW monthly, government funds (400,000 KRW monthly) will be deposited into their account as well. The goal is to save 100 million KRW over 10 years by accumulating 700,000 KRW monthly.