[NEWS IN FOCUS] Banks freeze new lending as loan-growth caps set

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[NEWS IN FOCUS] Banks freeze new lending as loan-growth caps set

Mortgages and jeonse loan ad in front of a commercial bank in Seoul on Monday. Banks have been tightening fresh loans pressured by the government. [YONHAP]

Mortgages and jeonse loan ad in front of a commercial bank in Seoul on Monday. Banks have been tightening fresh loans pressured by the government. [YONHAP]

Credit is being dramatically tightened, with some banks suspending new loans on orders from the financial authorities.  
 
NH Nonghyup Bank became the first to take away the punch bowl, announcing Aug.19 that it will suspend all fresh loans until the end of November.
 
Only unsecured loans will be made, and even that lending will be limited.
 
Woori Bank followed the next day, temporarily suspending loans until the end of September. The bank says it has already reached the maximum amount it can loan out in the third quarter.
 
Others haven’t announced similar moves but there were fears over the weekend that other financial companies could follow suit.
 
“It is the first time fresh mortgages have been stopped,” said Lee Kyoung-ja, an analyst at Samsung Securities. “Even though banks have already significantly reduced lending.”  
 
The analyst said if the suspension spreads to other banks that could drive up rates at non-bank financial institutions as borrowers will have no other choice.  
 
The moves come after financial authorities earlier told banks to keep the increase of fresh loans to 5 percent year-on-year.  
 
In the case of NH Nonghyup Bank, loans increased 7.1 percent last month.  
 
There were also reports that the financial authorities – the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS)- last week have asked non-bank financial institutions, such as savings banks and cooperatives, to do the same.
 
As worries over shrinking loan opportunities increased over the weekend, financial authorities tried to ease panic and fear of loan seekers, especially as moving season, which is typically in the fall, is around the corner.
 
In a statement released on Monday, the FSC stressed that the possibility of temporary loan suspensions by NH and Woori Bank spreading to other financial companies is low.
 
“Action were taken on those that exceeded their initial targets,” the statement said, mentioning NH by name. “Most of the financial companies including major commercial banks still have some room.”
 
The government has recently been warning against the Bank of Korea (BOK) raising interest rates, which could increase asset servicing costs and drive down property prices.
 
FSC Chairman Eun Sung-soo said on July 28 the government will have no other choice but to tighten household loans in the second half to keep the annual household loan increase to 5 to 6 percent.
 
“To keep it within 5 and 6 percent by year’s end, the second half increase needs to be managed between 3 and 4 percent.” Eun said of household loan growth.
 
According to the central bank, as of the first quarter of this year, household loans totaled 1,666 trillion won, which is a 9.5 percent increase year-on-year.  
 
The central bank will be announcing household loans outstanding for the second quarter on Tuesday.  
 
Koh Seung-beom has been chosen as the new FSC chairman. He was until recently a member of the central bank’s monetary policy committee and is seen as a hawk.
 
Koh was the only one that voted for a rate increase in July. After his nomination, Koh publicly called for a stronger approach in managing household debt.  
 
The central bank monetary policy committee holds its rate-setting meeting on Thursday. For every 1 percentage point increase, borrowers have to pay an additional 12 trillion won.
 
But there are those that believe the central bank is likely to hold interest rates considering the increasing difficulties many small businesses and households face due to the government extending its social distancing regulation.  
 
The government over the weekend extended the current level of social distancing another two weeks, although it increased the number of people that can gather after 6 p.m. from two to four under certain conditions.  
 
“We expect the monetary policy committee members to hold rates for August,” said Kang Seung-won, an NH Investment & Securities analyst. “The problem is Covid-19.”  
 
“Our fundamentals are strong including external credit scores as well as fiscal soundness,” Vice Finance Minister Lee Eog-weon said Monday. “However, there are also uncertainties, including the resurgence of Covid-19 not only at home but also abroad, as well as the U.S. tapering.”
 

BY LEE HO-JEONG [lee.hojeong@joongang.co.kr]
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