A man passes by banners promoting mortgage loan products in front of a bank in Seoul, Sunday. Yonhap
Banks’ spread hikes fail to offset falling market interest rates amid expectations of base rate cuts in 2nd half
By Jun Ji-hye
Combined household loans from the five major banks surged by more than 3.6 trillion won ($2.6 billion) this month despite financial authorities’ ongoing efforts to curb the growth of household debt, according to industry officials, Sunday.
Analysts attributed the rise to falling market interest rates that resulted in an increase in real estate transactions.
The Financial Services Commission’s (FSC) decision made at the end of June to postpone by two months the tightening of household loan limits, which was originally scheduled for July 1, has also contributed to increasing demand for the loans.
The total household loan balance of the five major banks — KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NongHyup Bank — amounted to 712.18 trillion won as of Thursday, up approximately 3.61 trillion won from 708.57 trillion won tallied at the end of June.
Household loans from the five lenders surged by 5.34 trillion won in June alone, led by a rise in mortgage loans. This marked the biggest monthly increase since July 2021.
The outstanding household loans of all financial institutions of the country came to 1,115.5 trillion won ($808 billion) in that month, up 6 trillion won from a month earlier.
In response to the rising household debt, the financial authorities have been working to tighten lending regulations gradually by implementing the stressed debt service ratio (DSR) rules.
The first phase of implementation took effect in February, but the second phase was moved from July 1 to Sept. 1 amid concerns over a sluggish economic rebound.
This delay has led more people to flock to banks asking for loans before the rules tighten.
In addition, increasing housing transactions have resulted in rising housing prices, promoting more people to desire to purchase homes.
“The expected decrease in the key interest rate within the year, coupled with the scheduled tightening of household loan limits, has played a significant role in the recent increase in housing transactions and the rebound in housing prices in the Seoul metropolitan area,” said Cho Soo-yeon, a senior researcher from KB Kookmin Bank.
Industry officials noted that, although banks are raising their spread in response to the financial authorities’ pressure to curb household loans, this is not enough to counteract falling market interest rates, which reflect expectations of base rate cuts by the United States and Korea in the second half of the year.
Customers and bankers are seen at a loan desk of a bank in Seoul, June 26, 2023. Newsis
Amid lingering concerns that the growing household debt is putting pressure on the country’s economy, the Financial Supervisory Service began on-site inspections into the five major banks and KakaoBank, July 15, to ensure compliance with its guidelines. But criticism is arising that the authorities provided the cause for the loan rise by postponing the DSR implementation.
“The financial authorities postponed the DSR implementation despite numerous signs of acceleration of the household loan growth, and are now taking belated countermeasures,” said Rep. Cheon Jun-ho of the main opposition Democratic Party of Korea.
“The regulator should come up with more effective control measures as the failure in managing household debt causes pain to the people.”
Meanwhile, Kim Byoung-hwan, the nominee to head the FSC, said, “It is important to establish the practice of borrowing money within one’s repayment capacity by reinforcing the DSR system.”
He made the remarks in a report submitted to the National Assembly, also on Sunday, a day before his confirmation hearing.
“It is necessary to expand regulations gradually and incrementally to prevent sudden shocks to consumers,” he said.