Watchdog mulls tightening unsecured loans amid sharp demand for property-related funds

South Korea's financial watchdog is considering tightening rules on unsecured loans as more people took out such lending excessively to buy homes or invest in stocks, financial sources said Sunday.

The financial regulator has stiffened rules on mortgage lending in a bid to curb rising housing prices, but people rushed to take out credit loans to buy houses amid cheap borrowing costs.

A rally in the stock market also prompted people to borrow unsecured loans for stock investments, including public subscription for initial public offering (IPO) shares.

"We need to map out ways to impose tailored regulations on unsecured loans that are taken out for purposes other than funding living costs," a regulatory authority official said.

The watchdog saw the need to regulate credit loans, but any hasty decision could spark a strong backlash as many people borrow such loans to cover living expenses.

Local banks' non-mortgage loans gained 5.7 trillion won ($4.8 billion) last month, larger than a 3.7 trillion-won increase in July and marking the largest monthly gain on record, according to the Bank of Korea (BOK).

Unsecured loans accounted for the bulk of banks' non-mortgage lending. The BOK said households rushed to borrow money to meet demand for property-related funds, stock investments and living costs.

The envisioned regulation is expected to focus on preventing people from taking out credit loans for property investments to avoid stricter rules on home-backed lending.

In a related move, the financial regulator may tighten rules for calculating home mortgages, or the debt service ratio that measures all debt principal and interest payments as a proportion of annual income.

The financial watchdog held working-level consultations with local banks last week in a bid to gauge the situation.

The Financial Supervisory Service also plans to hold a videoconference with deputy chiefs of five major banks Monday to discuss the issue. (Yonhap)