The Korea Herald


Banks’ dependence on household loans hurts economy: FSC chairman

By Son Ji-hyoung

Published : July 26, 2017 - 16:25

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Financial Services Commission Chairman Choi Jong-ku on Wednesday highlighted local banks’ overdependence on gains from household loans as a hurdle to wage-led growth and said he would lower the maximum interest rate to 24 percent from next year.

In his first press conference as the head of the nation’s top financial regulator a week after he took office, Choi pledged to address banks’ overreliance on mortgage loans, saying they have distanced themselves from their original role of screening risks and instead shifted the risks to households and businesses.

“Commercial banks have shifted their focus to household loans from corporate loans, especially after the financial crisis here in 1997, which has raised doubts on whether the financial sector contributes to job creation and national productivity,” Choi said. “The banks’ behavior to maximize their profit-taking has caused economic pollution and external diseconomies.” 

FSC Chairman Choi Jong-ku enters a briefing room to hold his first press conference at Government Complex Seoul on Wednesday. (Yonhap) FSC Chairman Choi Jong-ku enters a briefing room to hold his first press conference at Government Complex Seoul on Wednesday. (Yonhap)
South Korean lenders’ ratio of household credit to all lending surged to 43.3 percent as of 2016, compared to 27.4 percent in March 1998, according to data from the Bank of Korea.

Out of all household loans extended by banks in June, mortgage loans accounted for 75.2 percent. Driven by eased regulations for mortgage loans and the booming real estate market, Korea’s household debt reached 1,344.3 trillion won ($1.19 trillion) in 2016, after seeing a steeper rise since 2015.

Such “economic pollution,” in which financial consumers enjoy enhanced budgets through borrowing while society is left financially vulnerable, is a grave problem said Choi, quoting Adair Turner, former chairman of the United Kingdom’s Financial Services Authority.

Normalizing the role of banks as financial intermediaries that reap profits through asset management portfolios should be the start of a paradigm shift in the financial sector to bolster productivity, he added.

Meanwhile, Choi downplayed possibilities of curbing the volume of household debt, saying he would focus more on getting the pace of debt growth under control, at an appropriate level of household debt to disposable income.

Choi also vowed to lower the maximum legal interest rate of private lenders to 24 percent by January 2018, down from the current 27.9 percent.

The move would be a part of the FSC’s pursuit of “financial inclusion,” in which those with low income could enjoy financial services at affordable costs, Choi said.

Besides adjusting the legal lending rate, Choi pledged to resolve loans that are long overdue by August, strengthening oversight on loan sharks and mapping out a state-led financing scheme in order to bridge the gap in financial services in Korea.

By Son Ji-hyoung (