Loans are tightened to curb debt

The financial authority plans to apply stricter rules to borrowers to help curb rising household debt and protect consumers from an increasing financial burden as the benchmark interest rate is expected to go up next year.

Yim Jong-yong, chairman of the Financial Services Commission (FSC) said at a press conference on Thursday that the authority will come up with a finalized credit assessment plan later this month and start applying the new rules from January.

“The main principle of the authority’s household debt management plan is to lend money within a consumer’s financial ability and have them repay the original money from the beginning,” Yim said. “But we are not planning to make it difficult for ordinary consumers to get loans or apply higher rates. The purpose is to have banks lend money for well-qualified people.”

Banks will have to determine qualified consumers by examining their financial ability to repay debt by considering more factors. But the FSC chairman said it is not correct to say the authority is moving to raise interest rates or make loan issuances tighter.

One plausible measure included in the plan is to apply the so-called “stress rate” to determine the amount of payable loans.

As banks are investigated for their fiscal soundness regularly, consumers will also be put under the microscope for their financial ability, enabling banks to judge whether their customers are capable of paying interest and repaying loans.

For example, when a consumer already has a loan with a variable interest rate, their bank can recommend they switch to a fixed rate, considering the interest rate is expected to go up further which could pose a greater financial burden on the customer.

There is criticism that the financial authority encouraged consumers to buy homes with loans this year as it lowered the loan-to-value (LTV) and debt-to-income (DTI) levels. The aggregate household debt reached 1,200 trillion won as of last month, growing at its fastest rate.

The authority plans to introduce the debt service ratio (DSR), which calculates the amount of money a customer can borrow by taking into account their loans and interest payments at other financial institutions as well as annual income. The current DTI rule will be expanded to the DSR next year.

“There is a misconception that the government led people to buy a house with borrowed money,” Yim said. “It was part of normalization measures to put the real estate market back on track, which affects the daily lives of the working class. By easing the LTV and DTI regulations, the market showed a pickup with increased housing transactions, and housing prices are rising at a reasonable pace.”

BY SONG SU-HYUN [song.suhyun@joongang.co.kr]