The government will control the annual household debt growth rate to remain within the nominal growth rate to manage household debt. Additionally, it will strengthen related regulations, including the application of the Debt Service Ratio (DSR) regulation to Jeonse deposit loans.
On the 17th, the Financial Services Commission announced this at the 'Public Livelihood Discussion with the People (Government Work Report)' presided over by President Yoon Seok-yeol at the Korea Exchange in Yeouido, Seoul. This is due to concerns that household debt, which exceeds 100% of the Gross Domestic Product (GDP), could hinder the healthy growth of the Korean economy.
Recently, Korea's household debt-to-GDP ratio has been on a decline: 105.4% in 2021, 104.5% in 2022, and an estimated 100.8% last year. The annual increase in household loans last year was 1.01 trillion KRW, below the average increase of 8.32 trillion KRW over the previous eight years. However, since this is influenced by the ongoing high-interest-rate environment, authorities believe there is a need for long-term household debt management.
Accordingly, the Financial Services Commission plans to manage this year's household debt growth rate within the nominal growth rate, which is the sum of the real growth rate and inflation rate. To this end, the authorities will continue close monitoring, including negotiating individual management plans with financial institutions whose loan growth is excessive. They also plan to form a housing finance consultative body with related ministries and agencies such as the Ministry of Land, Infrastructure and Transport, Ministry of Economy and Finance, and the Financial Supervisory Service for meticulous management.
Kim So-young, Vice Chairman of the Financial Services Commission, responded to questions about whether the household debt increase at the nominal growth rate level is still significant by stating, "Although the absolute amount has increased under this government, the ratio relative to GDP is decreasing, indicating overall stabilization of household debt." She added, "Rapid reduction of household debt could lead to economic side effects and systemic risks, so we aim to reduce it within a range that does not burden the economy."
To establish the practice of "borrowing within repayment capacity," the DSR regulation will also be strengthened. For variable, mixed, and periodic loan products in the financial sector, a 'Stress DSR' reflecting future interest rate fluctuation risks will be introduced. Stress DSR is scheduled to be applied to bank mortgage loans by the end of February, tentatively expanded to bank credit loans and second-tier financial institution mortgage loans by June, and eventually to all loans across the financial sector within the year.
The scope of DSR application will also be expanded. The Financial Services Commission plans to apply DSR to Jeonse deposit loans following mortgage loans. This will be done by applying DSR to the interest repayment portion of Jeonse deposit loans. Vice Chairman Kim stated, "Specific plans have not yet been finalized," but added, "In principle, I believe it is appropriate to apply DSR to Jeonse loans as well."
Measures will also be taken to reduce borrowers' interest rate fluctuation risks caused by rapid interest rate rises or falls. To this end, the institutional foundation will be expanded so that private financial companies themselves perform the role of improving the quality of household debt, such as qualified loans previously handled by the Korea Housing Finance Corporation (HF).
Furthermore, to encourage the conversion of existing mixed (fixed) loans to periodic or purely fixed-rate loans, new administrative guidance on fixed interest rates and installment repayments will be introduced. Incentives related to the contribution rates to the Housing Credit Guarantee Fund and the Korea Deposit Insurance Corporation rates will also be provided.
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