[Q&A] Kwon Dae-young, Secretary General of the Financial Services Commission, "Borrow Only What You Can Repay"

Joint Meeting of Related Ministries on Household Debt
Continued Household Debt Management This Year
Principle: Borrow Only What Can Be Repaid

Kwon Dae-young, Secretary General of the Financial Services Commission, is giving a preliminary briefing on the agenda of the household debt inspection meeting on the afternoon of the 26th at the Joint Briefing Room of the Government Seoul Office in Jongno-gu, Seoul. Photo by Financial Services Commission.

The government held a joint meeting on household debt management with related ministries on the 27th and announced this year's household debt management plan.

The government stated that it will establish a policy for the financial sector to manage the scale and risk level of household debt on its own, focusing on actual demand borrowers, based on the principle of lending (borrowing) only as much as can be repaid and repaying in installments from the beginning.

The financial authorities plan to proactively respond to the expected increase in household debt due to interest rate cuts by implementing a three-stage stress Debt Service Ratio (DSR) system starting in July. The specific scope of application and stress interest rate levels will be finalized around April to May, considering the household debt and real estate market conditions.

Kwon Daeyoung, Secretary General of the Financial Services Commission, emphasized in a pre-briefing, "We will firmly establish the major principle within the financial sector that loans should be borrowed (lent) only as much as can be repaid and repaid in installments from the beginning."

To this end, he said, "We plan to review and finalize the specific details of the three-stage stress DSR in April to May and implement it from July. We will also encourage banks to properly obtain income data for loans that have not undergone income screening so far and use it for their own credit management."

He added that through this, financial companies will gradually improve so that loans can be supplied more precisely according to the borrower's income, assets, and creditworthiness. Additionally, the stress DSR interest rate reflection ratio for mixed-type loans will be raised from 60% to 80%. The stress interest rate ratio for periodic loans will also increase from 30% to 60%.

Below is a Q&A with Secretary General Kwon

- You mentioned managing debt monthly and quarterly. How exactly will this be managed? If a bank meets its supply target for February, will it be unable to process loans by the end of February?

▲ That is not the case. Financial supply must continue without interruption. If fewer loans are issued in January, they can be carried over to February, and so on, aiming to balance supply monthly and quarterly. The intention is to maintain a balanced supply rather than strictly stopping loans.

- There are criticisms that bank loan interest rates are not decreasing quickly. What are your thoughts on the speed of interest rate cuts by banks?

▲ Last year, as the real estate market overheated and we took measures to manage household debt, banks inevitably raised interest rates significantly. However, as the Bank of Korea lowers the base rate, there is a time lag in reflecting this, which seems to be causing complaints about interest burdens. The Financial Services Commission Chairman said, "There is room to lower rates, and the time has come," and I also believe action should be taken. Woori Bank proactively lowered loan rates in line with the Bank of Korea's base rate cut without delay, so other banks should not hesitate. While banks are in a difficult position, being told to manage loans while also being criticized on rates, the current speed and level of rate adjustments do not satisfy the public. The government hopes to show interest rate movements that people can feel, and I understand banks are moving accordingly in January and February.

- You mentioned that financial companies will launch their own long-term, fixed-rate mortgage loans. Could you provide more details? Also, regarding the use of mortgage-backed securities (MBS) or covered bonds as funding sources, will banks be allowed to issue these themselves?

▲ Currently, most bank funding is short-term, but funds for home purchases are for 10 to 20 years or more, causing a mismatch in operations. Since banks cannot supply long-term funds at fixed rates, policy loans from the Housing and Urban Guarantee Corporation (HUG) and Korea Housing Finance Corporation (KHFC) are mainly used in this market. We are encouraging banks to develop long-term, fixed-rate mortgage products, and KHFC will fill credit gaps and assist in issuing MBS or covered bonds. This is a fundamental issue we have raised and will pursue as a long-term task in close consultation with the banking sector.

- You said that regional banks and secondary financial institutions will be given somewhat more loan capacity. Could you specify this in percentages or amounts?

▲ We have set the total household loan growth rate for this year within the nominal growth rate of 3.8%, but there are differences by sector. I expect loan growth in the banking sector to be around 1-2%, even considering policy loans separately. Regional banks are expected to have a higher growth rate of about 5-6%, mutual finance institutions around the high 2% to low 3% range, and savings banks about 4%. This should provide considerable capacity for regional real estate. Importantly, we do not consider separate limits for policy loans for low-income borrowers, loans for closed businesses, or mid-interest loans as part of this quota.

- You mentioned that regional banks will receive incentives for mortgage loans on regional real estate, but that the risk weights of these loans could be increased depending on macroeconomic conditions. Some see this as contradictory to the government's household loan management direction.

▲ Household debt management can be viewed differently by stakeholders, so please understand that we have made the best combination under the circumstances. The Ministry of Land recently announced measures to strengthen construction, but the regional construction market is struggling. However, rather than simply allowing debt through DSR or other means, we opened some room to avoid constraints on household debt amounts in regions. Still, DSR, LTV, and other regulations continue to apply.

- The DSR system seems to assess that the principal and interest repayment burden relative to income is excessive. If it is refined in the future, is there a possibility of a blanket reduction, or will adjustments be made by expanding the scope of DSR application? Please share the direction.

▲ If someone spends 40% of their income repaying debt, they are struggling with debt. DSR protects consumers by ensuring they borrow only what they can repay, and it also supports financial institutions' soundness and consumers' repayment capacity. While it should ideally be lower, it is difficult for the government to implement this immediately, so it is a long-term direction.

- You said the guarantee ratio for rental deposit loans in the metropolitan area will be gradually strengthened. Is there a timeline?

▲ Public guarantees for rental deposit loans have become common and contributed to housing stability for low-income actual demanders. However, there was also a perception that these loans were used for real estate speculation or gap investments. Since 100% public guarantee is somewhat excessive, lowering it to 90% means banks bear 10% of the risk, strengthening credit screening. Additionally, it will help filter out loans to those who should not receive them due to insufficient income and prevent rental deposit fraud.

- You are reviewing raising the stress interest rate reflection ratios for mixed-type and periodic products. If implemented, will this coincide with the three-stage implementation?

▲ Since this is under review, if conditions are met, it will proceed. However, the level has not been decided yet. We will conduct simulations with the Korea Federation of Banks and consider the impact on the public before deciding.

- Acting Chairman Choi Sang-mok said the household debt ratio will be reduced to 80%, but this year's forecast is 90.5%, showing a gap. Is it realistically difficult to lower the ratio?

▲ The long-term goal is 80%. While it would be good to reduce debt immediately, there are impacts to consider. Our policy goal is to gradually stabilize and lower the ratio.