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(2nd LD) Regulator vows to prioritize reining in household debts

All News 15:35 October 06, 2016

(ATTN: UPDATES with comments on DTI, housing prices in paras 10-15; ADDS photo, byline)
By Lee Chi-dong

SEOUL, Oct. 6 (Yonhap) -- South Korea's top financial regulator said Thursday the government's priority is to rein in mounting household debts dogging Asia's fourth-largest economy.

Speaking to lawmakers, Yim Jong-yong, chairman of the Financial Services Commission (FSC), pointed out that it's the "biggest risk factor" for the economy already in distress due to a number of setbacks including sluggish export growth and domestic spending.

"The government is trying to deal comprehensively and thoroughly with the issue," he said during an annual parliamentary audit of the FSC's affairs.

Household credit here jumped 11.1 percent on-year to an all-time high of 1,257.3 trillion won (US$1,131.7 billion) in the second quarter of 2016, boosted by prolonged low interest rates and unrelenting demand for new apartments, according to official data.

In August, related authorities announced a package of measures to curb mortgage-backed debts including the control of new apartment supply. But there is no indication of a tangible drop in borrowing and many expect household credit to exceed 1,300 trillion won by the end of this year.

A silver lining is that mortgage loans extended by banks have shrunken due to the tightened screening of applicants.

Yim Jong-yong, chairman of the Financial Services Commission, speaks during a parliamentary audit at the National Assembly on Oct. 6, 2016. (Yonhap)

On the other hand, collective borrowing by new apartment buyers has continued to rise. Its ratio to the total mortgage loans soared to 49.2 percent in the first half of this year from 12.4 percent six months earlier.

Household debts from non-bank lenders are on the increase as well.

"The FSC is making every effort to cope (effectively) with potential risk factors facing our economy and establish a more stable financial system," Yim said.

He dismissed a call for the tightening of restrictions on mortgage loans.

"It's not desirable to frequently raise and lower the debt-to-income (DTI) ratio (required for households' borrowing)," he said. "It's more urgent to improve the quality of household debts and slow the growth pace."

It measures an individual's debt payment to his or her overall income.

In 2014, the authorities eased the rules by jacking up the DTI ratio to 60 percent from 50 percent for those seeking to purchase houses in Seoul in a bid to help boost the real estate market.

"Compared with the DTI standards in foreign countries, 60 percent is not that high," he said. "The average DTI ratio actually applied (in South Korea) is 30.3 percent."

He also played down worries about continued hikes in housing prices following the Aug. 25 announcement of measures to control apartment supply, saying it's a tentative phenomenon in some specific regions, in particular three districts in southern Seoul: Gangnam, Seocho and Songpa.

This file photo shows house prices in a southern Seoul area. (Yonhap)

He added the government will keep pushing for the speedy restructuring of the nation's shipping and shipbuilding industries on the basis of firm principles.

In case of Daewoo Shipbuilding & Marine Engineering Co. (DSME)'s impaired capital base, Yim said the state-run Korea Development Bank, also the main creditor of the troubled shipbuilder, is reviewing various ways for a "fundamental improvement" of the shipyard's financial structure.

"Steps to address its capital problem should be taken within this year," Yim said. "If so, the problem at DSME, with the trading of its stocks currently suspended, can be resolved."

He also requested the National Assembly's legislative support for the FSC's reform drive.

He cited the need to revise legislation on banking services and the capital market to introduce Internet-only banks and transform the Korea Exchange, which is the nation's sole bourse operator, into a holding firm.


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