As the South Korean government has prohibited multiple homeowners from taking out a mortgage to prevent real estate price hikes and is planning to implement stricter regulations on a debt service ratio (DSR) starting from next month, banks are expected to have difficulties in increasing their loan assets. Currently, household loans, including mortgage loans, account of more than 50 percent of the total loan assets held by banks. Accordingly, the government’s stricter real estate policy is highly likely to adversely affect banks’ growth.
According to investment banking (IB) industry sources on Sept. 16, some bank presidents held an emergency meeting with executives even on Sunday to cope with the government’s new real estate policy. The financial authorities asked banks to explain changes in loan policy to their customers to avoid confusion. Banks have started reconsidering their long-term strategies to deal with the cooling down of their household loan business caused by the new real estate policy.
Under the new policy, owners of two or more homes cannot take out a mortgage loan when they purchase a new house in a restricted region. They also can get up to only 100 million won (US$89.326) worth of a loan for living in principle. They have to receive approval from the loan review committee at financial companies and sign a document that they wouldn’t use the money to get a house in order to get an additional loan. When a couple has a combined income of 100 million won (US$89.326), it cannot get a new loan for rent subsidy.
Although the real estate policy announced on Aug. 2 last year flattened out the growth in mortgage loans in the aftermath of reduction of a loan-to-value ratio and debt-to-income ratio, banks still saw mortgage loans increase 30 trillion won (US$26.8 billion) in the past year and the nation’s top five banks saw loans for rent subsidy grow 12 trillion won (US$10.72 billion) during the first eight months this year alone. Considering the fact, banks are forecast to be hit hard. The financial industry predicts that secure loans for individuals and loans for rental business operators will greatly shrink.
Particularly, the effect of the tighter loan policy will be greater when the previous standard for DSR decreases from the current 100 percent to 80 percent starting from next month. This is because banks have to consider borrowers’ ability to repay credit loans and other loans along with the regulations on the total loan amount.
A CEO of a commercial bank said, “Starting from next month, we expect to see difficulties in growing loan assets so we reflected it in our business strategy. We have to consider what the fundamental growth strategy for the changed banking business environment would be by diversifying profit sources, such as global market, IBs and small and mid-size companies. However, it is impossible to see an accomplishment in expanding the global market and strengthening IBs in the short term, and there is a limit in expanding loans for small and mid-size technology firms.”