Household Loan to Be Reigned from Next Month

Low interest funds of the Bank of Korea (BOK) will be assigned less to the banks, which have exposed themselves too much to the household loans, beginning from May. The BOK declared on April 8 that the "aggregate credit-ceiling regime", which is a low interest fund of annual interest rate of 2.5 percent, would be less extended to certain banks that exceeded certain standards of household loans beginning from May.

That is, while the household loans exceed the basis amount by 10 billion Won, the aggregate credit-ceiling scheme is currently slashed by 6 billion Won, but in the future the slash would be about 8 billion Won. When this happens, the banks` profitability will be deteriorated. The basis amounts of the household loans by banks are designated and noticed monthly by the Monetary Policy Committee.

Additionally, the aggregate credit-ceiling scheme to the banks, which fail to follow the loan ratio on Small and Medium Sized Enterprises (SME), would be cut down. While currently 50 percent of the unfulfilled amount is slashed, in the future 70 percent would be slashed. Currently commercial banks should lend 45 percent of the loan increase to SME and, in the cases of regional banks, 60 percent is the ratio. In addition, the ceiling amount of the aggregate ceiling-credit scheme that banks may receive in proportion to the loan increase to SME will increase from 300 billion Won to 500 billion Won.

According to the BOK, the total sum of the household loans of the deposit banks (including commercial banks, regional banks, domestic branches of foreign banks, the Enterprise Bank, and Agricultural, Fisheries, and Dairy Cooperative Banks) as of the end of March is 172 trillion and 11.44 billion Won, which is an increase of 17 trillion and 48.96 billion Won compared to the end of last year. The increased amount of household loans between January and March is about 4.6 times bigger than the figure of the same period of last year, which is 3 trillion and 80 billion Won, and is more than the increased amount to the enterprise loan, which is 12 trillion and 71.72 billion Won.

Vice director of the policy planning bureau of the BOK, Na Sang-Uk said, "We worry about the side-effects such as the default of household loans since the increase rate of the household loans is much bigger than the SME loans," and added, "We have prepared these measures since SME`s, which are highly dependent on bank loans, face difficulties in getting loans even though economic recovery is expected."

In relation to this, governor of the BOK, Park Seung warned when he emerged from the Monetary Policy Committee, "We will hike the overnight call rate when the economy is recovered and prepare the reigning measures against the household loans since the side effects of low interest rate such as hikes of asset values are appearing following the provisional demand generation of the household loans."

Sang-Chul Kim sckim007@donga.com