S. Korea to speed up enforcement of stricter income-based lending rules to rein in household debt

South Korea said Tuesday it will enforce stricter lending rules based on borrowers' repayment capability at an earlier date than initially scheduled to curb soaring household debt that has emerged as one of the most serious potential risks on the economy.

Loans for home rentals, however, will not be subject to the government's tightened lending rules until the end of this year as part of efforts to supply credit for those in actual need of borrowing.

Those are part of a string of measures the government announced Tuesday to keep a lid on soaring household debt and prevent it from weighing on the country's overall economic recovery from the fallout of the coronavirus pandemic.

"In consideration of the scale and growth, household debt has recently emerged as the largest potential risk that could threaten our economy," the Financial Services Commission (FSC) said in a press release.

"We will enhance the actual efficacy of the DSR system in a way that lending practices based on repayment capability could spread and take its root at an earlier date," the FSC added.

The debt service ratio (DSR) gauges how much a borrower has to pay for principal and interest in proportion to his or her yearly income, which serves as a ceiling on aggregate lending.

Since July, the FSC has applied a 40 percent DSR on borrowers who buy a home worth more than 600 million won ($512,000) in regulated regions.

The financial regulator plans to expand the application of the rules in the coming years in two steps under which they will also be applied to borrowers who have outstanding loans of more than 200 million won in July next year and to those who have outstanding loans of more than 100 million won in July 2022.

The regulator said it will move up the timetable for the application by beginning the first-step expansion in January next year and the second-step enforcement in July of the same year.

The current 60 percent DSR applied to non-banking loans will also be tightened to 50 percent in January next year, which will lead to a reduction of loans to those seeking to borrow, the FSC said.

The tightened rules, however, will not be imposed on "jeonse" loans for home rentals taken out during the fourth quarter of this year, the FSC said, amid complaints that such restrictions have made it harder to borrow money to find a place to live.

Under South Korea's decades-old jeonse system, tenants pay a large lump-sum deposit, known as key money, to the landlord, which is then returned at the end of the rental agreement, which usually lasts two years. During the lease period, the tenants do not pay monthly rent.

President Moon Jae-in earlier ordered his staff to closely monitor banks to ensure a smooth supply of loans for jeonse home rentals.

Tuesday's measures represented the latest in a series of steps the government has unveiled to rein in household debt, which has grown at a faster clip since 2020 amid nationwide efforts to stimulate the economy from the coronavirus pandemic.

Household debt grew by 7.9 percent on-year in 2020, a faster growth pace than a 4.1 percent rise in the previous year. The debt expanded by 10.3 percent on-year during the second quarter of this year.

Though the household debt growth has slowed down slightly since September following the government's toughened lending rules and the impact of the Bank of Korea's rate hike in August, the upward pressure still remains high amid strong demand for borrowing due to surging home and rental prices.

The central bank recently kept its policy rate unchanged at 0.75 percent for October but hinted at the possibility of another rate hike next month amid worries over rising inflation and household debt.

The FSC said it will strive to maintain the household debt growth rate in the 5-6 percent range for this year and lower it to the 4-5 percent range for next year, pre-coronavirus levels. (Yonhap)