Household borrowing capped by annual income

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Koh Seung-beom, appointed chairman of the Financial Services Commission, answers questions during a confirmation hearing held at the National Assembly on Friday in Yeouido, west Seoul. [YONHAP]

Households will only be able to borrow as much as their annual income as financial authorities try to curb the country’s growing household debt.

According to sources in the financial sector on Sunday, Hana Bank has already capped its unsecured loan and its overdraft as of Friday. For unsecured loans, the limit was set at the borrowers’ annual income and for the overdraft at 50 million won ($ 43,000).

So far, local banks have taken into account borrowers’ credit scores, the size of the organizations they work for, their annual income, and other factors when setting upper limits on their loans.

Starting next month, however, more banks will begin to limit the limit on unsecured loans to match borrowers’ annual income. They will take into account loans from all institutions.

The Woori Bank will impose a cap on new unsecured loans from next month. Shinhan Bank and KB Kookmin Bank review the plan.

Some online banks have also jumped on the bandwagon. KakaoBank will limit the maximum value of unsecured loans to the borrowers’ annual income from next month. Bank K has also decided to impose the same limit, but when the cap will be placed has not yet been decided.

This major tightening of unsecured lending by banks in Korea comes after the country’s financial authorities requested cooperation from the banks in an earlier meeting with executives this month.

The Financial Supervision Service held a meeting with the leaders in charge of lending at the main local banks and asked them to limit the maximum amount of unsecured loans to the borrowers’ annual income. The regulator has also asked banks to submit plans on how they will impose limits on their lending programs.

“It is very likely that most commercial banks in Korea will limit the maximum amount of unsecured loans to the borrowers’ annual income from next month,” a local bank source said on condition of anonymity. “They were strongly pushed by the financial authorities.

The big banks’ decision is expected to soon be emulated by other financial institutions such as savings banks, insurers and card companies. The financial authorities have made the same request to these financial institutions in case customers migrate massively to these institutions once the banks tighten lending.

The government could come up with additional plans to reduce household debt without hurting households in desperate need of loans.

“We will deal thoroughly with household debt so that its rapid increase does not undermine the soundness of the financial market,” Koh Seung-beom, candidate for the post of head of the Financial Services Commission, said during his hearing of confirmation to the National Assembly held on Friday. “If there is a need for an additional plan, we will develop it and actively pursue it. ”

Koh, however, has stressed that he will ensure that those who really need loans – and not just borrow to invest, such as households that don’t own a home – are not disadvantaged by financial regulators’ efforts to cut back. the loans.

As part of the financial authorities’ efforts to curb rising debt, average loan interest has risen to nearly 3 percent lately.

According to Bank of Korea data on Friday, the average interest rate on new bank loans to households last month rose 0.07 percentage points from the previous month to 2.99 percent annually. The rate is the highest since 3.01% recorded in October 2019.

BY YOUN SANG-UN, AHN HYO-SUNG AND KIM JEE-HEE [kim.jeehee@joongang.co.kr]


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