Banks ease loan regulations as household debt plummets.
Commercial banks have recently announced that they are increasing bank overdraft limits and extending their lending for jeonse, long-term rental deposits on residences.
This is a quick turnaround from last year, when authorities encouraged banks to tighten lending as low interest rates encouraged more borrowing, especially for property purchases.
Woori Bank raises overdraft limits for employees workers earning at least 20 million won ($16,000) a year, rising from 50 million won to 200 million won from April 4. Woori Bank reduced its overdraft facility to 50 million won in January 2021.
Woori Bank also started offering jeonse loans up to 80% of the entire deposit from last week.
Under the jeonse system, unique to Korea, tenants pay a large deposit to live in a property for several years.
Previously, the bank offered loans for increases in jeonse deposits required by a homeowner, but not for the base amount.
Earlier this month, KB Kookmin Bank also raised overdraft limits and increased jeonse lending. Last week, Shinhan Bank increased its jeonse lending and plans to raise its overdraft limits later.
“The amount of loans increased rapidly last year due to low interest rates,” said Huh Woong, spokesperson of KB Kookmin Bank.
Total household debt outstanding at five commercial banks – KB Kookmin Bank, Shinhan Bank, Woori Bank, Hana Bank and NongHyup Bank – was 705.29 trillion won as of March 24, down 0.09% on the month. In February, outstanding household debt fell by 0.2% month on month.
Banks are looking for ways to ease loan regulations as profits could be hit by lower demand for loans with higher interest rates.
The average interest rate on household debt, which includes mortgages and bank overdrafts, was 3.91% in January compared to 2.83% in January 2021.
Government regulations have also discouraged borrowing.
Beginning this year, credit card loans are included in measures of the debt-service ratio (DSR) for individuals, calculated by dividing a person’s income by their monthly loan payment. The DSR indicates a person’s financial capacity to repay their debt.
“Despite the easing of restrictions by banks, the amount of borrowing a person can borrow is limited by the DSR,” said Bae Hyun-il, spokesperson for Woori Financial Group. “Furthermore, even though a person can borrow 80% of a jeonse deposit, the interest on the loan will be burdensome for many people as interest rates approach 4%.”
To solve the problem of “household indebtedness, residential real estate supply must increase to stabilize asset prices,” said Kim Jung-sik, professor emeritus at Yonsei University’s School of Economics.
BY JIN MIN-JI, AHN HYO-SUNG [[email protected]]