Tue, 07 Dec 2021

SEOUL, Oct. 26 (Xinhua) -- South Korea's financial regulator said Tuesday that it will tighten lending rules based on borrowers' repayment capability as household debt continued to grow fast.

According to the Financial Services Commission (FSC), the regulator launched a 40-percent debt service ratio (DSR) regulation since July to spread the lending practices based on repayment capability.

The DSR refers to a ratio of how much principal and interest borrowers should pay annually to their annual income.

Since July, the ceiling has been applied to mortgage loan of over 600 million won (514,000 U.S. dollars) in regulated regions and credit loan of over 100 million won.

The 40-percent ceiling on the combined loan will be applied earlier than initially scheduled to the outstanding loans of over 200 million won in January next year and of over 100 million won in July next year each.

The FSC said in a statement that household debt recently emerged as the biggest potential risk, which can threaten the economy, in consideration of the debt's scale and its rising pace.

South Korea's ratio of household debt to gross domestic product (GDP) rose rapidly from 87.3 percent at the end of 2016 to 104.2 percent as of the end of June this year, according to FSC data.

It was far faster than the ratios for Japan from 57.3 percent to 63.9 percent in the cited period, for France from 56.2 percent to 65.8 percent, for Germany from 52.9 percent to 57.8 percent, for Britain from 85.3 percent to 89.4 percent and for the United States from 77.5 percent to 79.2 percent each.

The debt-servicing burden for households was forecast to increase amid the widespread expectation for policy rate hike later this year.

The country's central bank raised its benchmark interest rate from a record low 0.50 percent to 0.75 percent in late August. The central bank indicated a 25-basis-point rate hike in November.

The current 60 percent DSR for non-banking loans will also be tightened to 50 percent in January next year to curb the so-called balloon effect.

Under the balloon effect, loan demand recently moved from banks to non-banking institutions amid the tightened lending standard among banks. (1 U.S. dollar equals 1,167.5 won)

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