Loan demand softens, so banks make borrowing easier

A customer gets advice about loans at a commercial bank in Seoul in October. [YONHAP]

Banks are easing loan regulations as household debt slumps.

Commercial banks recently announced they're raising bank overdraft limits and expanding their loans for jeonse, long term rental deposits on residences.

It's a fast turnaround from last year, when authorities encouraged banks to tighten lending as low interest rates encouraged more borrowing, especially for real estate purchases.

Woori Bank is raising overdraft limits for salaried workers making at least 20 million won ($16,000) a year from 50 million won to 200 million won starting April 4 . Woori Bank cut its overdraft facility to 50 million won in January 2021.

Woori Bank also began offering jeonse loans for up to 80 percent of the entire deposit starting last week.

Under the jeonse system, which is unique to Korea, tenants pay a large deposit to live in a property for a number of years.
Previously the bank was offering loans for the increases in jeonse deposits demanded by a landlord, but not for the base amount.

Earlier this month, KB Kookmin Bank also raised its overdraft limits and increased its jeonse loans. Last week, Shinhan Bank increased its jeonse loans and plans to raise its overdraft limits later.

“The amount of loans grew rapidly last year because of low interest rates,” said Huh Woong, a spokesperson for KB Kookmin Bank.

Total household debt outstanding at five commercial banks – KB Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank and NongHyup Bank – was 705.29 trillion won as of March 24, down 0.09 percent on month. In February, outstanding household debt fell 0.2 percent on-month.

Banks are looking for ways to ease loan regulations because earnings could be affected as demand for loans falls with higher interest rates.

The average interest rate for household debt, which includes mortgages and bank overdrafts, was 3.91 percent in January compared to 2.83 percent in January 2021.

Government regulations have also discouraged borrowing.

Starting this year, loans on credit cards have been included in measurements of individuals' debt service ratio (DSR), calculated by dividing a person’s income by his or her monthly loan payments. DSR indicates a person’s financial capability to repay debt.

“Despite banks’ easing of restrictions, the amount of borrowing a person can do is limited by DSR,” said Bae Hyun-il, a spokesperson for Woori Financial Group. “Also, even though a person can borrow 80 percent of a jeonse deposit, the interest for the loan will be heavy for many people as interest rates approach 4 percent.”

To resolve the issue of “household debt, residential real estate supplies needs to increase to stabilize asset prices,” said Kim Jung-sik, an emeritus professor at Yonsei University’s School of Economics.

BY JIN MIN-JI, AHN HYO-SUNG [jin.minji@joongang.co.kr]