Loan issuance continues to rise amid record debt

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Loan issuance continues to rise amid record debt

Despite the previous government’s efforts to curb the country’s rising household debt, more Koreans took out loans last month than the previous month, raising the specter that the new administration under liberal President Moon Jae-in might adopt stricter policies to scrutinize lending practices.

Koreans took out 7.3 trillion won ($6.5 billion) in new loans in April, the Financial Services Commission said Monday, much larger than the 5.5 trillion won borrowed in March.

Compared to the same month a year ago, though, the figure fell 19 percent, suggesting government policies in the past year have done some work in managing new loan issuance.

Still, Korea’s household debt remains at a record high, and the central bank considers it a major risk, as it faces the possibility of raising interest rates to keep up with rate hikes by the U.S. Federal Reserve. Increasing Korea’s rates would further hamper debtors’ ability to pay back their loans.

From month to month, new loans continued to rise in April, and the Financial Services Commission cited an ongoing boom in the real estate market. Borrowing from nonbank lenders including savings banks, cooperatives and insurance companies slightly increased compared to the previous month, and loans taken from banks rose to 4.6 trillion won in April from 3 trillion won in March.

A Bank of Korea official cited seasonal trends as the reason for the rise. Spring tends to be a popular season for moving, and loans related to apartment buying and rental deposits typically rise around this time. Of the 4.6 trillion won in loans taken out at banks, more than 70 percent were mortgages. About 1,000 more apartments were sold in April than March.

The previous government under Park Geun-hye tried to ease the pace of borrowing by tightening the evaluation standards that lenders use. This March, just before Moon was elected into office, the government tightened loan standards at nonbank lenders, which tend to cater to borrowers with bad credit and issue loans with high interest rates. Since March, they have had to raise their loan loss provision on riskier loans to cover possible defaults. It was meant to discourage them from marketing riskier products.

As household loans are showing no signs of cooling, the question is what policies the new administration under Moon will adopt to ease the country’s rising debt.

On the campaign trail, Moon suggested further tightening lending conditions by limiting the debt burden a household can take on to 150 percent of disposal income. Such a ratio, which was 133.1 percent at the end of 2012, has jumped to 151.1 percent at the end of September last year. This means that while income hasn’t improved much, household debt has risen sharply.

Other policies under consideration include stricter regulations that make it harder for those with multiple loans from different institutions to seek loans. These borrowers could be evaluated based on the total debt they hold rather than on the current system that only looks at income.

For the next two months, household debt is expected to continue growing as roughly 110,000 apartments will go on sale preconstruction this month and next month.

Preconstruction sales are usually concentrated in April, but this year, because of the snap presidential election held this month, construction companies feared lack of interest from homebuyers waiting to see who will be elected to office and pushed the dates back to May and June.

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