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Banks face penalties for exceeding outstanding household loan balances

Published: 02 Jan. 2025, 18:28

SHIN HA-NEE
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A promotion poster for a mortgage product is displayed outside a bank in Seoul on Jan. 2. [NEWS1]

The financial authorities are mulling imposing penalties against major lenders for exceeding their targets for last year’s outstanding household loan balances, indicating that loan tightening by banks will continue into the new year.

Shinhan Bank, Hana Bank and Woori Bank — three of the five major commercial banks in Korea — failed to meet the initial targets submitted to regulators for outstanding household loan balances by the end of the year, meaning that they issued more loans than planned, according to sources from financial authorities and banks.

Korea’s financial regulators, the Financial Services Commission and the Financial Supervisory Service, have repeatedly warned lenders that those who failed to meet their household loan targets would be subject to penalties in their 2025 business plans, likely with a lower cap for their average debt service ratios (DSRs).

Lowering the average DSRs, which currently stand at around 30 percent, would require the banks to reduce borrowing limits for new loans, likely resulting in fewer potential loans this year.

Speculation suggests, however, that the penalties may be softer than expected, as some lenders focused on refinanced loans instead of new loans or set particularly stringent targets from the beginning.

The financial authorities are currently in discussions with banks for this year’s household loan management plans, with an aim of setting the loan growth target within the nominal GDP growth rate for 2025, which is estimated at around 4 percent.

Considering that the Korean economy is expected to see slower growth this year and the country’s household debt-to-GDP ratio has increased significantly since the Covid-19 outbreak, the regulators are likely to set the loan growth target below the 4 percent mark.

This year’s household loan growth target, therefore, is estimated to come in around the 3 percent range, including policy-driven loan programs, which would further bring down the possible borrowing limits for banks. Loan management would also become stricter, possibly with monthly and quarterly goals set throughout the year, in order to prevent a steep surge similar to the rapid jump seen last summer.

A person enters a booth for an automated teller machine, or ATM, in Seoul on Dec. 30, 2024. [NEWS1]

Banks have cautiously begun to ease the heightened mortgage loan standards put in place to curb strong demand during the latter half of last year with the start of the new year.

Therefore, the five major banks’ loan-deposit interest rate differentials, which ranged from 1 to 1.27 percentage points last month, are likely to remain at the current levels as continued loan tightening would likely delay the narrowing of the gap. December marked the first time since March 2023 that the loan-deposit interest rate differentials at all five banks surpassed the 1 percent threshold.

“Loan regulations will be eased primarily for customers who intend to purchase a house for actual use [as opposed to investment purposes] for now,” said a source from a commercial bank who wished to remain anonymous, adding that “the loan-deposit interest rate differentials will decrease with a gradual reduction of the interest rate spread.”

Meanwhile, chiefs of Korea’s major financial groups noted heightened uncertainties in the economic environment this year while stressing the importance of bolstering internal controls in their New Year’s Greeting messages issued on Thursday.

“We are expecting a year more unpredictable than ever with chaos and changes,” said KB Financial Group Chairman Yang Jong-hee, calling on the group’s executives and employees to “demonstrate solid trust and stability to mitigate any anxieties for our customers and the market.”

After a turbulent year marked by major loan scandals, Woori Financial Chairman Yim Jong-yong said, “Now is the time to take the step to rebuild trust and make a new start with a sense of desperate urgency that this is our last chance,” promising to implement a fundamental change in its internal control system.

BY JEONG JIN-HO, SHIN HA-NEE [[email protected]]