By Kim Tae-sung
The South Korean financial authority extended a campaign to rein in household debt to the non-banking sector upon surge in its consumer loans by demanding loss reserves for loans that carry a lending rate of over 20 percent per annum.
Concerns about snowballing household debt - particularly the spike in the non-banking sector that levies much higher lending rates - heightened after the U.S. Federal Reserve accelerated increases in short-term interest rates, a move that could send market yields up and lending rates higher in Korea as well.
The Financial Services Commission (FSC) on Sunday sent out a guideline to institutions in the segment - savings banks, credit card, and capital companies - requiring them to stack up 50 percent more in loss reserves for any lending they charge interest of more than 20 percent per annum. They would have less to extend to consumers if they have to pile up greater loss reserves for existing loans.
The guidelines would likely go into force from the second quarter.
New bank loans extended households came to 68.8 trillion won last year, down by 12.0 percent from a net increase of 78.2 trillion won in 2015. In contrast, such loans provided by insurers, savings banks, and other non-bank financial institutions snowballed by 55.1 trillion won, up 72.7 percent from a year ago.