Korea’s financial watchdog plans to curb excessive growth of household debt by tightening banks’ loan-to-deposit ratios and requiring non-bank institutions to raise loan-loss reserves, its head said Thursday.

Korea is grappling with snowballing household debt as heavy indebtedness is feared to crimp economic growth by putting restraints consumer spending. The government plans to unveil a set of measures to rein in growing household debt next week in a bid to tackle potential market instability.

“The financial watchdog plans to seek to stem excessive growth of household debt as well as make efforts to mend the structure of household debt to soften the impacts of rate hikes,” Financial Supervisory Service Gov. Kwon Hyouk-se said in a forum.

Korea’s household credit, including loans and credit purchasing, reached 801.4 trillion won ($744.5 billion) as of the end of March. Korean households’ capacity to service debt worsened in the first quarter as debt increased faster than income growth and rising interest rates are feared to further hurt households’ ability to repay debt.

Kwon said as part of efforts to rein in snowballing household debt, the FSS plans to closely monitor lending practices of banks and tighten rules on banks’ loan-to-deposit ratios.

The loan-to-deposit ratio, a gauge of a bank’s solvency, measures the percentage of a bank’s loans against the amount of its deposits. A higher reading means that the bank extended more loans than it could raise funds.

Korean banks’ loan-to-deposit ratio once hovered above 100 percent, which was blamed as their major vulnerability to a liquidity squeeze at the height of the global financial turmoil.

“The FSS will also require non-bank institutions including consumer financing firms to set aside more loan-loss reserves as borrowers with low credit ratings tend to take loans from them,” the governor said.

According to the central bank, home loans extended by non-bank institutions grew by 2 trillion won in April, up from a 1.4 trillion won on-month expansion in March.

Kwon also noted the FSS plans to induce local financial firms into extending home loans with fixed lending rates as part of its drive to mend banks’ lending practices.

As the bulk of banks’ mortgage loans is extended with floating lending rates, households are more exposed to risks if interest rates are on the rise.

Korea plans to encourage more households to mend the practice of only repaying interest on their mortgage loans without paying out principal for an extended period of time, he said.

Touching on the issue of handling ailing savings banks, Kwon said the watchdog may get the broad picture of which savings banks are in trouble in September.

The Financial Services Commission, the financial regulator, is seeking to overhaul the troubled sector in the second half following the first round of the restructuring.

Korea has suspended operations of eight troubled savings banks since early this year as they suffered from deteriorating asset quality, hit by soured construction loans. One player was sold to No. 2 banking group Woori Finance and the government is seeking to sell the remainder this year. 

(Yonhap News)