South Korea cracks down on bank lending to cool housing market

Banks must cap the volume of high-risk loans they extend.

South Korean banks have to meet a new set of lending guidelines by November 7 as part of the administration’s overall effort to slow the rapid pace of household credit growth and rein in the heated property market. 

Commercial banks are required to keep a lid on what is defined as ‘highly risky loans’ to no more than 10% of its total household loan portfolio. A highly risky loan is defined as a loan where the principal and interest combined exceed 90% of an individual’s annual income.

The share of risky loans or loans wherein the principal and interest combined exceed 70% of the client’s annual income, also cannot exceed 15% of the bank’s household loans.

The rules aim to lend support to regulatory efforts aiming to tame the country’s housing market and clamp down on real estate speculation as home prices and household debt surged side-by-side in the past three years.

A report from credit rating agency Fitch has identified Korea amongst APAC markets whose rising levels of property exposure are raising associated risks of deteriorating asset quality.