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Lawmakers approve gov’t debt control plan

Oct 24,2017

Lawmakers of the ruling party reached an agreement on debt control measures on Monday to introduce tightened loan-to-value (LTV) and debt-to-income (DTI) ratios next year as the country’s household debts keep on climbing amid anticipated interest hikes from both the central banks of the United States and Korea.

Members of the Democratic Party gathered to discuss the proposal, which is scheduled to be released today. The government typically consults the ruling party in the hope of reaching a consensus before major policy announcements.

Finance Minister Kim Dong-yeon briefed lawmakers at the National Assembly.

“To assess the accurate capacity to make good on debt obligations, [the Ministry of Strategy and Finance] will revise the DTI system next January and will adopt the debt service ratio by the second half of 2018,” Kim said.

The debt service ratio measures potential borrowers’ creditworthiness by reviewing their other debt obligations, including principal balance, along with income. The authorities originally planned to embrace the measurement in 2019 but the timing had been pushed forward.

As for the new DTI measure, the Finance Ministry and the Financial Services Commission plans to change the way it is calculated in order to better reflect the actual income level when financial institutions screen mortgage loans.

The country’s total outstanding household debts reached the 1,400 trillion won ($1.24 trillion) mark as of the end of September and continued to rise albeit at a slower pace.

The economic chief also stressed the need to support struggling borrowers, hinting at debt forgiveness.

“The measure will include debt adjustment and even forgiveness for the marginalized,” Kim said.

“There will be concerns of moral hazard but the government will move to minimize such an impact,” he said.

The Moon Jae-in government initiated a large-scale debt relief program in August to support people who signed up for the National Happiness Fund but struggled for a long time to pay relatively small amounts.

The National Happiness Fund is a state-run fund established by the former Park Geun-hye administration to help low-income people write off debts.

The program forgave debts overdue for 10 years if the amount is less than 10 million won.

But the move also triggered criticism since it discourages people from fulfilling their obligations.

With the U.S. Fed and the Bank of Korea signaling an interest rate hike in the coming months, the government is on high alert to contain the swirling debt levels.

The market sees that the Fed will increase its benchmark rate in December. As for the Bank of Korea, analysts are more divided, but the central bank’s unusually hawkish comments spurred some to project a rise in November.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]