"Banks Demand Easing of DSR for Online Debt Consolidation Loans"

People with DSR over 40% Cannot Use Debt Consolidation Loans
"Lowering Interest Rates Is Also Discrimination," Issues Raised

It has been about a month since the Financial Services Commission launched an online one-stop refinancing loan platform service that allows borrowers to switch their credit loans to lower interest rates. Banks, which are leading the competition to attract loan customers from other financial institutions, are raising their voices, asking the financial authorities not to apply DSR regulations.

DSR Poses a Barrier to Interest Rate Cuts... Banks Request Regulatory Exemptions

There are reasonable grounds for such claims. DSR (Debt Service Ratio) refers to the proportion of principal and interest repayments relative to annual income. The primary financial sector is regulated at 40%, and the secondary financial sector at 50%. For example, if the annual salary is 50 million won, one can only borrow loans with principal and interest repayments up to 20 million won and 25 million won per year, respectively. This regulation applies to anyone who has borrowed more than 100 million won from financial institutions. It was created in the context of "borrowing only as much as you can repay."

The problem is that refinancing loans are also subject to DSR regulations because they are considered loans. When switching to a lower interest rate, the principal and interest to be repaid decrease, thus lowering the DSR. However, those with a DSR exceeding 40% cannot take advantage of refinancing opportunities due to this regulation. According to the Bank of Korea, as of the fourth quarter of last year, 32% of all borrowers in South Korea have a DSR above 40%. This means that 3 out of 10 borrowers cannot use refinancing loan services.

Financial consumers and banks have expressed opinions such as, "People with heavy debt should be encouraged to switch to lower interest rates, but blocking refinancing with regulations is unfair," "Should those with high debt be discriminated against when lowering interest rates?" and "Applying DSR to refinancing loans is a contradictory policy."

Year-End Mortgage Refinancing Begins... Unfairness Controversy Expected to Grow

A senior official from the Financial Services Commission said, "From the perspective of individual citizens, it is desirable to exempt refinancing loan services from DSR regulations," but added, "If demand for refinancing loans becomes too high, financial instability may occur, and financial institutions facing capital outflow issues oppose it, so we are currently gathering opinions."

Currently, the refinancing loan platform only applies to credit loans, but if the scope expands to include mortgage loans by the end of this year, the fairness controversy may intensify. A representative from a commercial bank said, "Compared to credit loans, mortgage loans are much larger in scale, so if switched properly, the amount of principal and interest saved could reach tens of thousands of won per month," and predicted, "If nothing changes, borrowers with a DSR over 40% will not be able to refinance their mortgages either, which could lead to a flood of complaints about unfairness."

Meanwhile, the Financial Services Commission announced that as of the 21st, the amount of loans moved through the refinancing loan infrastructure reached 500.5 billion won. Looking at the loan movement patterns, loans moved within the primary financial sector?including commercial banks, regional banks, and internet banks?accounted for 92.3% of the total. It is estimated that the total annual interest savings for financial consumers who switched to lower interest rates exceed 10 billion won. The reason for the low proportion of secondary financial sector loans is that borrowers in this sector generally have lower credit ratings, making it difficult to obtain loans from the primary financial sector. Additionally, secondary financial institutions such as savings banks have high deposit funding costs, so they cannot lower loan interest rates due to concerns about negative interest margins.

Currently, there are a total of nine loan comparison platforms in operation. Banks are also competing by offering conditions such as "up to 0.4 percentage points reduction in existing salaried worker loan interest rates" and "0.5 percentage points preferential interest rates for refinancing loan products."