Stricter loan evaluations to come

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Stricter loan evaluations to come

Borrowers seeking unsecured loans can expect tougher evaluations of their creditworthiness by the year’s end after the government decided to include income as a criterion.

“We will implement the household debt [curbing] measures [announced on Aug. 25] as soon as possible,” Financial Services Commission Chairman Yim Jong-yong said Monday, though he did not give an exact timeline for when the new measures would be implemented other than saying by the end of the year.

The government initially hoped in August to have bank loan officers adopt the debt service ratio, which evaluates a borrower’s ability to repay a loan by comparing its principal and interest with the person’s income, starting next year but pushed up the implementation date on concerns that the number of people taking out unsecured loans is rising.

The debt service ratio will add a stricter criterion to the main measure currently used by loan officers to evaluate ability to pay back unsecured loans, the borrower’s credit score.

The government has decided to adopt the stricter measure to address a recent spike in unsecured loans, which do not guarantee the issuer any collateral if a borrower defaults. In the second quarter of this year alone, the amount of such loans increased 9.9 trillion won ($8.9 billion) compared to the previous quarter, marking the second-largest amount of unsecured loans taken out in a quarter.

With the adoption of the debt service ratio, those who cannot prove their income or who have multiple loans from different financial companies will have difficulty requesting unsecured loans.

In further steps to curb household debt, both the Korea Housing and Urban Guarantee Corporation and the Korea Housing Finance Corporation will limit their loan guarantees to two loans starting next month. The limit is currently set at four.

The government is also planning to introduce measures that will strengthen evaluations on mortgage loans issued by nonbanking financial companies. It is also encouraging loan seekers to apply for programs in which payments are made in installments rather than in a lump sum before the loan’s maturity.

“The Financial Services Commission and Financial Supervisory Service will operate a special joint task force to closely monitor the household debt situation and act accordingly in necessary situations,” Yim said.

The commission chairman also spoke on measures the government would take in reforming the system of listing companies on the Korean stock market.

“We plan on newly implementing the so-called Tesla requisite, where companies that are suffering from deficits will be allowed to list on the stock market if they are evaluated to have growth potential and a certain amount of business footing,” Yim said.

The term “Tesla requisite” refers to the electric-carmaker, which posted negative profits when it listed on the Nasdaq but managed to expand after raising money through a public offering on the U.S. stock index.

By contrast, in the Korean stock market, only companies recording positive revenue and profit have been allowed to publicly list, largely as a way to protect investors who could suffer losses if the listed companies go bankrupt.

However, companies looking to expand their business have argued that this rule prevents them from attracting needed investment that can be gained through a public listing.

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