Bank loans are suddenly falling due to warnings from the authorities

Major South Korean banks are on the way to tightening their unsecured personal loans, apparently in response to continued efforts by tax authorities to curb “excessive lending.”

The outstanding personal loans here, issued by five major lenders – KB Kookmin, Shinhan, KEB Hana, Woori, and NH NongHyup – fell to 126.9 trillion won, 243.6 billion won ($ 209.3 million) on Thursday less than the previous day, data showed on Sunday.

This marked a sharp turn from the sustained gains seen during the month. The balance added around 1.1 trillion won from September 11 to 16, climbing from 125.19 trillion won to 126.33 trillion won.

In mid-September, demand for credit was fueled by widespread speculation that the tax authorities would soon tighten credit regulations to ensure the country’s financial health.

But with concrete measures taking shape recently, and the banks’ decision to tighten their lending accordingly, the personal credit balance fell into a downturn.

One of the game changers was the September 14th gesture by the Watchdog Financial Supervisory Service to tighten its oversight by asking key lenders to come up with plans that could effectively curb personal loan demand by September 25th.

“It appears that the current limit on personal loans is too high compared to borrowers’ incomes,” a senior FSS official said at a meeting with bank vice-presidents responsible for lending.

A plausible reaction would be to get rid of the traditional base rate on credit loans and lower the exceptionally high credit limit for certain professions such as doctors and lawyers, industry officials said.

As the government intensifies efforts to cool the heated housing market at all costs, mortgage rate terms are also expected to have an impact in the coming weeks after the Chuseok holidays. Onlookers also predict that banks will lower the credit limit for those in the “upper income bracket”, including civilian workers and employees of large corporations.

Banks have often done business with such institutions or companies in order to increase the credit limits of their employees and to grant loans with relatively low interest rates.

Asia’s fourth largest economy is apparently facing a “credit crisis” in the wake of the COVID-19 pandemic. Experts emphasized that this year would be a moment of “calm before the storm” and that the tax authorities would have to be on their guard against late payments and defaults in the next year.

In addition to the rise in credit loans, the outstanding household loans granted by major lenders in August rose by 11.7 trillion won from the previous month to 948.2 trillion won, according to the Bank of Korea. This is the largest volume that has expanded since 2004.

The problem is that the government is pushing local lenders to introduce various loan waiver programs for coronavirus-affected citizens and business owners without considering the risks of crime and default, according to experts.

“An economic slowdown has worsened the fiscal soundness of credit and credit for small and medium-sized businesses (and the situation is likely to deteriorate) due to deferred payments and interest,” said a Korea Ratings analyst.

The latest decision by the BOK to cut the key interest rate to a record low of 0.5 percent has triggered waves of ultra-low interest rates in the banking sector. This has resulted in retail investors taking out bank loans to invest in stocks and real estate.

The BOK’s decision was made to combat the economic hardship due to the coronavirus pandemic.

By Jung Min-kyung ([email protected])

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