SEOUL, Aug. 26 (Korea Bizwire) — South Korea’s financial authorities have called on local banks to tighten their screening for unsecured loans as part of efforts to cope with rising household debt, sources said Thursday.
The Financial Supervisory Service (FSS) recently required all commercial lenders to submit their plans to adjust caps on credit loans extended to individual borrowers by Friday.
Banks have thus come up with or are mapping out plans to cut back on caps on unsecured loans, according to the sources.
Nonghyup Bank, the flagship banking arm of NH Financial Group Inc., said Tuesday that the cap on individual credit loans should be lowered to 100 million won (US$85,700) or less from 200 million won.
The cap on new unsecured loans will be reduced to 100 percent of a borrower’s annual income.
Following Nonghyup Bank’s move, KB Kookmin, Hana and other commercial lenders are poised to follow suit, with major internet-only lender Kakao Bank expected to take a similar step, according to the sources.
The latest FSS move comes after it requested a meeting of bank lending executives to call on lenders to cut caps on their unsecured loans to the level of borrowers’ annual income.
Local financial authorities are putting their top priority on curbing a sustained increase in household debt, which some experts say is a time bomb for Asia’s fourth-largest economy.
South Korea’s household credit reached a record high of 1,765 trillion won ($1.51 trillion) as of end-March, up 9.5 percent from a year earlier, according to central bank data.
In April this year, the Financial Services Commission (FSC), the decision-making body of the FSS, announced a set of measures to slow the growth of household debt by expanding tougher rules to more mortgage borrowers.
In line with the measures, the FSC said Thursday it will revise rules for unsecured loans extended by savings banks and other non-bank financial institutions.
Under the revised rules slated to take effect in July next year, those financial institutions would be required to put up more loss reserves for individual borrowers’ credit lines.
Industry analysts said tighter loan-loss reserve requirements may lead to less income and thus prompt non-bank financial institutions to impose tougher curbs on unsecured loans.