South Korean financial services regulator Financial Services Commission (FSC) says banks in the country will tighten guidelines next year when screening applicants for loans. This is in hopes of slowing down the snowballing household debt in the economy.
Banks in South Korea currently focus on whether loan applicants have the ability to pay back interest, but the FSC’s guidelines will require them to more closely assess an applicant’s ability to pay back the full loan.
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The new guidelines will be enforced on banks located in Seoul as well as the metropolitan areas around it from 1 February next year while those in other areas will need to observe the guidelines beginning 2 May.
Loan applicants who live outside Seoul and its surrounding metropolitan areas are currently not subject to the debt-to-income ratio, but they will be under closer scrutiny once the guidelines are enforced. They will be asked to provide more information on their income and spending – including credit card data and insurance payments.
According to the Bank of Korea, household debts rose 10.4 percent this year (as of end-September) compared to last year’s 6.5 percent and 5.7 percent in 2013.
South Korean households’ debt-to-disposable-income ratio was 163.8 percent at end-2012. This is well above the Organisation for Economic Co-operation and Development’s average of 134.8 percent.
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