Household Debt Doubles in Two Months... Financial Supervisory Service Imposes Penalty Now

Household Debt Scale at 106% of Annual Business Plan
At 50% Range Until First Half... Doubled in July-August
"Banks with Excessive Household Loans to Lower Average DSR"

As the scale of household debt in the banking sector has nearly doubled in two months, financial authorities have expressed their intention to intervene in commercial banks' lending operations. Banks that have issued more household loans than their management plans set earlier this year will be guided to reduce their lending limits.

According to the Financial Supervisory Service (FSS) on the 28th, the increase in household loans compared to the annual management plans (excluding policy loans) of the four major banks (KB Kookmin, Shinhan, Hana, and Woori) was recorded at 150.3% as of the 21st. For the entire banking sector, it was about 106.1%. When annual management plans are converted to an 8-month period, the four major banks reached 200.4%, and the entire banking sector reached 141.4%.

Looking at individual banks, among the five major banks, Bank A set a goal to increase household loans by about 200 billion KRW compared to the previous year, but as of the 21st, the household loan balance increased by about 800 billion KRW. Accordingly, Bank A's performance ratio compared to its management plan was 376.5%. The performance ratios of the other five major banks, excluding Bank A, ranged from 52.3% to 155.7%.

The FSS paid attention to the fact that the scale of household loans in the banking sector nearly doubled in the two months of July and August. The increase in household loans compared to management plans was only slightly above 50% until the first half of this year, but as of the 21st, it exceeded 100%. On the 3rd of last month, Lee Junsu, former Deputy Director in charge of Banks and Small and Medium-sized Enterprises Finance at the FSS, told reporters at the FSS headquarters in Yeouido, Seoul, “In the first half of this year, the banking sector's household loan performance compared to management plans averaged just over 50%, not reaching 60%.”

An FSS official explained, “Until May and June, household loans were within the manageable range, but there was a surge once in July and again in August. This seems to be due to rising housing prices, increased housing transactions, and the upcoming implementation of the second phase of the Stress Debt Service Ratio (DSR) next month, which has caused a recent surge in household debt.”

With concerns that the increase in household debt has exceeded limits, the FSS introduced a kind of ‘penalty’ such as reducing lending limits. Park Choonghyun, Deputy Director in charge of banks, held a briefing on ‘Household Debt Management Response’ yesterday and said, “For banks with excessive household loan performance compared to management plans, we will guide them to lower their average DSR,” adding, “It is necessary to differentiate average DSRs when setting next year’s management plans.” The DSR is the ratio of a borrower's principal and interest payments to their income; a lower average DSR means the bank’s allowable principal and interest payments, i.e., lending limits, are reduced.

The FSS also emphasized the justification for this lending reduction approach. Deputy Director Park said at the briefing yesterday, “If household debt increases excessively, it could harm financial soundness and market stability, and there are concerns about consumer protection issues, so regulatory discipline by supervisory authorities is necessary.”

In a phone interview with Asia Economy, Deputy Director Park said, “Large banks have monthly repayments of about 500 billion to 1 trillion KRW,” and added, “If the FSS intervenes now, when the household loan increase trend is sharply rising, banks can meet their household loan performance targets compared to management plans.” He further explained, “Taking action in October or November might be ineffective, so we judged that now is the most appropriate time.”