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Latest effort to curb debt focuses on non-banks

The country’s financial regulatory agency will introduce stricter underwriting standards and credit reviews for loans issued by financial cooperatives in a bid to curb rising household debt.

The move announced Friday comes as lenders are seeing record-high debt levels from loans.

“The growth rate of loans issued by second-tier financial institutions [lenders other than commercial banks] averaged 8.2 percent between 2013 and 2015, but that accelerated to 13 percent entering this year,” said Yim Jong-yong, chairman of the Financial Services Commission and nominee for minister of strategy and finance.

“Considering that people with relatively low incomes often turn to these institutions for loans, we need to manage potential risks in a pre-emptive manner.”

The new guideline for financial cooperatives, set to go into effect early next year, will focus on further scrutinizing the ability of borrowers to pay back mortgages.

The commission will also urge financial institutions to adopt plans that require borrowers to pay both principal and interest rates in installments from the beginning.

Yim added that the Financial Services Commission would tighten monitoring to ensure that non-commercial bank lenders are not loosely offering lending services.

“By the end of this year, we will inspect the state of risk management by financial cooperatives and the Korea Federation of Community Credit Cooperatives, which increased their loan size this year.”

The intensified pressure on these lenders is the latest effort to slow the impact of rising debt in the financial sector. Most recently, the Financial Services Commission pressured major commercial banks to tighten their screening processes for loans, especially mortgages. The major banks paid heed to the regulator’s push and managed to reduce the size of mortgages in October from a year earlier.

Mortgages from the country’s six largest lenders - KB Kookmin Bank, Shinhan Bank, Woori Bank, KEB Hana Bank, NH Nonghyup Bank and the Industrial Bank of Korea - increased by 742 billion won ($636 million) in the first five business days of this month, according to data compiled by the banks. The amount represents a 42 percent decrease from a year earlier.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]