Reduce lending gradually

Some large banks have ceased offering new consumer loans based on advice from the government, confounding customers ahead of a major national holiday.

The Financial Supervisory Commission recently recommended that Nonghyup, Woori Bank and Shinhan Bank refrain from extending new loans, noting that the three banks’ household loan growth rates had outpaced those of other banks.

In an effort to curb consumer debt, the FSC announced in June new guidelines for restricting excessive lending by banks. When the rise in bank loans to individuals failed to come down, the FSC called in the vice presidents of several banks to deliver its new directive. The FSC reportedly commanded banks not to exceed new retail borrowing by 0.6 percent from the previous month.

We have repeatedly warned that household debt, which has topped 800 trillion won ($743 billion), could have a negative effect on the economy and its future and have urged the government to take steps to address the problem. We suggested that banks encourage repayment of both principal and interest and lend money based on fixed rates rather than floating ones. But an abrupt cut in new loans is a bad solution. Customers will naturally be bewildered if banks suddenly stop extending loans without any advance notice.

The day before they were going to stop providing new loans, banks sent out text messages to customers informing them of the new policy. This is poor and irresponsible customer service on the part of the banks. Meanwhile, the financial authorities also have been too harsh by setting monthly growth rates as a yardstick to measure the increase in bank loans. Their actions could have an immediate effect on reining in household debt, but their authoritative ways go against the principles of the market and they are resorting to stopgap measures without considering the possible repercussions.

Banks should seek ways to reduce loans gradually, instead of suddenly cutting customers off just because loans grew more than 0.6 percent from the previous month. It seems they have not considered the situation of homeowners who had planned to take out loans to return rental deposits or small- and mid-sized companies that must settle payments for raw materials.

Chuseok is just three weeks away and demand for cash peaks at this time. Banks should contain reckless lending, but they must do it in a sophisticated and consumer-friendly way.