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Banks to use tougher loan standard in 2018

Nov 27,2017
The government on Sunday announced a timeline for implementing a stricter lending standard in the hopes of cooling Korea’s heated real estate market and controlling household debt that has spiraled to record levels.

The Financial Services Commission, Korea’s financial regulator, will require local banks to adopt the debt service ratio when determining prospective borrowers’ eligibility for loans starting in 2018.

The debt service ratio is stricter than the currently used debt-to-income ratio because it compares all of a potential borrower’s outstanding debt obligations, instead of just mortgages, to the borrower’s income.

Under debt-to-income, if a borrower already has a mortgage and applies for a new loan, lenders only recognize the principal of the new loan and interest on the existing mortgage as the person’s outstanding debt.

But using the debt service ratio, banks will be required to take into account all loans that an applicant has taken out, including mortgages, credit card and auto loans.

The commission is also strengthening the debt-to-income standard to include the principal of existing mortgages. The stricter standard will take effect in January, and the commission will allow banks to use both ratios.

The announcement on Sunday is a follow-up to a promise that the commission made on Oct. 24 to adopt the debt service ratio as a lending standard. Under the timeline, commercial banks will begin testing the debt service ratio in the first quarter of next year.

The Financial Services Commission will then review the results and set a regulatory standard in the fourth quarter.

For so-called second-tier lenders like savings banks (essentially consumer finance companies) and credit unions, the debt service ratio will be used starting in the second quarter of 2019.

The latest initiative is part of the government’s efforts to cool a heated real estate market. Home prices and mortgages have skyrocketed in recent years thanks to a construction boom, and President Moon Jae-in, who took office in May, has made efforts to discourage borrowing through measures like raising the eligibility for new loans in hot areas.

But the policies have had little effect. According to the Bank of Korea, the total amount of outstanding household debt reached a record 1,419 trillion won ($1.3 trillion) at the end of September. This means the average amount of debt per household in Korea has exceeded 70 million won.

About 50 percent of the debt is in mortgages, and the government considers them a ticking bomb for the economy because it is limiting domestic consumption. The burden of repayment is likely to worsen as the central bank is set to raise the key interest rate - which has remained at a record-low 1.25 percent for over a year - as early as Thursday, when the monetary policy committee holds its next meeting.

The real estate market is also showing no signs of cooling down. Apartment prices in Seoul rose by 0.18 percent during the third week of November, the steepest increase since the government introduced measures in August to clamp down on real estate speculation, according to the Korea Appraisal Board.

BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]