Banks Tighten Lending Rules

Banks and second-tier lenders are tightening lending rules under pressure from the government as housing prices and household debt spiral out of control.

Woori Bank last week said it suspended loans for jeonse or Korean-style deposit lease until late September due to exhausted limits, while Standard Chartered decided to suspend part of housing loans and NH Nonghyup Bank halted housing loans altogether until November.

Financial authorities in April told them to keep the increase in household loans at under six percent a year. The total amount of household debt has surpassed W1.7 quadrillion and is increasing at breakneck speed, but drastic measures like stopping all lending would also be catastrophic (US$1=W1,183).

"There's a spike in household loans, but the government's attempts to control it exceed its bounds," said Prof. Shin Se-don of Sookmyung Women's University. "Consumers will bear the brunt if banks suspend loans and even second-tier lenders tighten lending rules."

Those who had been planning to borrow or whose loans are expiring soon are getting jitters. Last Thursday, a person put a petition on the Cheong Wa Dae website calling for an end to loan curbs. "Individuals in a capitalist society have the freedom to manage their funds based on their own judgment of risks and opportunities," the petitioner wrote.

But financial authorities believe that household debt is the main cause of skyrocketing property prices. They are determined to deflate the loan-fueled real-estate and stock market bubbles.

Household loans jumped from W1.61 quadrillion in the first quarter of last year to W1.68 quadrillion in the third quarter and W1.77 quadrillion in the first quarter of this year.

Loan limits could be curtailed drastically as the Financial Supervisory Service recently told banks to reduce limits on under-W100 million credit loans from the double the size of borrowers' salary to the size of their salary.

Yoon Min-seop of the Korea Financial Consumers Protection Foundation said, "It makes no sense to put a limit not just on new loans but also overdrafts of faithful borrowers with a good credit rating."

"End-users will more likely suffer if the government implements a coarse-grained policy like suspending loans altogether instead of gradually trying to reduce household debt," he added.