South Korea’s financial regulator has decided to move up the planned enforcement of stricter evaluation for consumer mortgage-backed and credit loans by a month to December amid little sign of easing in household debt.

“We will implement actions to curb household debt as early as possible,” said Yim Jong-yong, chairman of the Financial Services Commission on Monday. “The task force consisting of FSC and Financial Supervisory Service officials will keep close track of (household debt-related) conditions.”

Under the new regulation, banks and insurers will determine whether to extend new consumer loans based on debt service ratio (DSR) after studying personal credit data they gain from Korea Credit Information Service.

DSR measures borrowers’ fresh debt repayment ability by comparing total principal and interest of existing debt with their annual income. DSR is considered stricter than the debt to income ratio (DTI) as it reflects not only the repayment ability of existing loan interest but also the principal.

The implementation of DSR is expected to make it tougher for borrowers with existing debt to receive fresh loans from financial institutions as banks and insurers would have to review their previous loan balance, interest, and repayment period. In particular, borrowers with collective mid-term payments or overdraft loans will have higher DSR measurement, making it more difficult for them to be granted new loans.

For example, if a borrower with annual income of 50 million won ($45,250) that has been allotted a new 500 million won apartment is repaying 200 million won or 40 percent of the apartment price as mid-term payment, the annual amount of principal repayment would be 100 million won based on two-year maturity. If the borrower would like to receive fresh credit loans worth 5 million won with one year maturity, the DSR would be calculated as 210 percent, which is excessively higher than the optimal level of 60 to 70 percent.

By Kim Hyo-sung

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