The financial regulator on Monday announced fresh rules to toughen household lending at non-bank financial companies, putting the brakes on burgeoning private sector debt, which is nearing 900 trillion won ($801 billion).

Lenders in the secondary banking sector, including cooperatives, have been ordered to limit lending money to non-members of the credit firm to less than one-third of their total loan, according to the Financial Services Commission. The National Agricultural Cooperative Federation is allowed to make half of their lending to non-members. Fisheries cooperative unions are exempt from the restriction.

Cooperatives and insurers are requested to bring their loan-to-deposit ratios down to less than 80 percent within two years. The package is a follow-up measure to the policies announced last year after deposits flocked to the high-yielding secondary banking sector and loans were made relatively easy. The first set of measure from last June toughened lending restrictions at commercial banks but was criticized for driving the demand to the secondary banking sector, which carries a higher risk of default.

“The rate in which cooperatives and insurers have been increasing loans has become a dangerous one. They are struggling to find appropriate places to manage their deposit base, which increased as rates at commercial banks stayed low for quite some time,” an official at FSC said.

More households have been borrowing from the secondary banking sector than ever in the past year, prompting the regulator to restrict deposit-taking and lending activities. Imprudent lending practices could continue increasing household debt.

The regulator said it will ask halt marketing activities such as sending text messages or fliers which could encourage households to apply for high-risk loans.

The country’s household credit surpassed 900 trillion won as of December, of which 642.7 trillion won were from non-bank institutions. Household credit in the September-December period grew 7.8 percent from a year earlier, with the growth rate inching down from the two preceding quarters.

By Cynthia J. Kim
(cynthiak@heraldcorp.com)