Banks urged to tighten home loan screening to slow household debt

The nation's top financial regulator on Tuesday urged banks to tighten their screening of home loan applications to help slow the growth of household debt.

South Korea tightened lending rules for mortgages last month, but critics say loopholes give some people room for borrowing money in excess of the lending limits to buy homes.

Kim Yong-beom, vice chairman of the Financial Services Commission, told representatives from banks that the growth of household debt could pick up during the second half of the year, citing a rise in sales of new homes.

Kim called for banks to apply "pre-emptive management" by strictly screening applications for home loans.

Household debt stood at 1,388.3 trillion won ($1.23 trillion) at the end of June, up 10.4 percent from a year earlier, according to the Bank of Korea.

Household debt is estimated to exceed 1,400 trillion won this month, given that household debt rose by about 18 trillion won in July and August. 

Although there is little risk that household debt may spark a financial crisis, rising debt chokes off private consumption and makes it difficult for the central bank to raise its key rate amid global monetary tightening.

Next month, the FSC is scheduled to announce a fresh package of measures, including the debt service ratio, to rein in the growth of household debt.

Banks and other financial institutions can accurately figure out the financial status of a borrower if they adopt the DSR.

The DSR, published by the Bank for International Settlements, reflects the share of income used to service debt. It's regarded as a reliable early warning indicator for systemic banking crises.

Currently, the local financial sector is advised to use the DSR on a voluntary basis. (Yonhap)