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| Deputy Prime Minister and Finance Minister Hong Nam-ki speaks during a meeting with top financial regulators at the Export-Import Bank of Korea (Eximbank). Yonhap |
The government decided Thursday to tighten lending rules in stages to slow down the pace of household debt growth, which is expected to hit 6 percent this year and 4 percent in 2022, levels seen before the COVID-19 pandemic started.
Through the measure, the government seeks to rein in the steep increase in borrowing over the past year amid the economic crisis triggered by the pandemic, as the economy shows clear signs of a rebound with the prospect of herd immunity being achieved sooner.
Deputy Prime Minister and Finance Minister Hong Nam-ki said a new regulation, called the debt-service ratio (DSR), will be applied to better manage the debt increase.
DSR is measured by the borrower’s annual income divided by the principal and interest on all household loans. It is more stringent than the debt-to-income (DTI) ratio which factors in only interest payments on loans, with mortgage principal being the only principal considered.
“The government will strengthen regulations to limit demand for excessive loans. Some will take effect soon. Full implementation will begin in July 2023,” he said during a meeting with top financial regulators at the Export-Import Bank of Korea (Eximbank).
The government will overhaul related rules to strengthen management of macroeconomic soundness. It will set a standard that considers a borrower’s ability to pay back debt.
“The government will lay the groundwork for a gradual implementation of the new rule to cap household debt growth to 5 percent to 6 percent this year and 4 percent next year. This is expected to help many understand that the amount borrowed not only means paying interest but also part of the principal,” he said.
Loopholes in the current lending rules will be eliminated and financial assistance for low-income earners and young people will be expanded.
“A prospective rise in income will be considered for lenders so that young people and low-income earners are not deprived of loan opportunities. The borrowing period will be extended to up to 40 years to lessen their burden to pay back the principal,” he said.