Household Debt Management 'Warning Signal'... Late Financial Supervisory Service "Strict Measures for On-site Inspections of Banks"

Lee Junsu, Deputy Director of Banking and Small Business Finance, Hosts Household Debt Meeting
"Maintain Household Debt Ratio in the Low 90% Range Until Year-End"
Household Loans Surge Sharply in May-June... Government Faces Emergency in Managing Household Debt
"Premature Interest Rate Cuts and Expectations of Housing Price Increases May Accelerate Growth"

The financial authorities recently announced that they will manage the sharply increased household loans, driven by expectations of interest rate cuts and increased real estate transaction demand, in a stable manner within the nominal GDP growth rate range this year, aiming to maintain the household debt ratio at the low 90% range by the end of the year. In particular, starting from the 15th, they plan to conduct on-site inspections of household loan management practices in the banking sector and take strict measures against any identified issues.

On the 3rd, the Financial Supervisory Service (FSS) held a meeting on household debt in the banking sector, chaired by Lee Junsu, Deputy Director of Banking and Small and Micro Finance, with vice presidents from 17 domestic banks, reiterating this policy. The meeting discussed the recent causes of household loan increases, management directions for the second half of the year, and the current status of financial support operations for tenants affected by jeonse fraud.

According to the financial sector, as of the end of June, the outstanding household loans of the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?were recorded at KRW 709.57 trillion. This is an increase of about KRW 5.34 trillion compared to KRW 703.23 trillion in May, marking the largest increase since KRW 6.2 trillion in July 2021. The increase was mainly driven by a rise of about KRW 5.84 trillion in mortgage loans.

Accordingly, the FSS evaluated that Korea's household debt as of the end of last year was at 93.5% of GDP, having declined for two consecutive years and generally managed stably. However, since household loans began to increase in April, the upward trend has continued, centered on the banking sector.

Deputy Director Lee stated, "The increase was mainly driven by policy loans such as Didimdol and Buteemok, a decline in household loan interest rates in the banking sector, and increased housing transactions centered on apartments in Seoul and the metropolitan area." He added, "We will manage the household debt ratio relative to GDP at the low 90% level and firmly maintain the stable management stance of household debt by gradually solidifying and expanding DSR regulations."

He emphasized the need for the financial sector to strengthen proactive management, as the second half of the year may see an accelerated increase in household loans due to hasty expectations of interest rate cuts and anticipated housing price rises.

Deputy Director Lee pointed out, "At a time when asset soundness management is urgently needed due to rising delinquency rates in personal business loans, household loans, and real estate project financing (PF) loans, it is not desirable to recklessly expand mortgage and other household loans." He added, "We plan to stably manage the household loan growth rate within the nominal GDP growth rate range by the end of the year so that household loans do not become a burden on the macroeconomy."

He particularly urged banks not to recklessly expand loans by riding the recent overheated atmosphere but to thoroughly manage household loans within the management targets set by each bank at the beginning of the year. It is reported that major banks have set their annual household loan (excluding policy loans) growth targets at around 2-3% for this year.

He also requested that business feasibility evaluations for sorting out the real estate PF market be conducted rigorously and without delay. Deputy Director Lee mentioned, "Along with managing household mortgage loans, it is necessary to conduct strict business feasibility evaluations in the corporate loan sector to quickly normalize the real estate PF market, which is facing difficulties due to excessive fund concentration in the real estate market, so that this can lead to improvements in housing market supply and demand."

He emphasized the firm continuation of efforts to solidify and expand the current Debt Service Ratio (DSR) regulations. The financial authorities believe that loan screening practices based on borrowers' repayment ability, rather than relying on collateral value, must be established to ensure the soundness of household loans.

Deputy Director Lee said, "Each bank must thoroughly manage to prevent any misapplication of the current DSR regulations at actual branch counters. Furthermore, banks need to autonomously understand and manage borrowers' repayment abilities, including income, for all household loans going forward."

He also announced plans to take strict measures against any issues identified through on-site inspections of household loan management practices in the banking sector. Deputy Director Lee stated, "We will verify whether the household loan management policies are properly implemented at actual business sites." He added, "This inspection will focus on banks' compliance with loan regulations such as DSR, the establishment of household loan management targets, and management systems."

Meanwhile, Deputy Director Lee requested thorough efforts to ensure that the government's financial support measures for tenants affected by jeonse fraud are promptly and effectively implemented at bank branches.

He said, "Each bank should check whether support services for victims of jeonse fraud are properly carried out at frontline business sites and conduct thorough training for bank branch and call center staff to ensure victims receive accurate counseling and responses." He also urged, "For regions with many cases of jeonse fraud, banks should consider establishing dedicated counseling desks within branches."