Growth of household loans extended by South Korean financial institutions slowed sharply in May from a month earlier due mainly to a policy loan program aimed at improving the quality of household debt, central bank data showed Tuesday.

Outstanding household lending by local lenders and non-banking institutions totaled 768.2 trillion won ($682.2 billion) as of the end of May, growing 2.9 trillion won from the previous month, according to the data by the Bank of Korea.

The monthly gain marks a sharp slowdown from a record 10.1 trillion-won gain in April that was attributed to a fall in interest rates that spurred property transactions as homeowners shifted to monthly lease systems, prompting tenants to purchase homes.

Local lending and deposit rates have been trending lower following a series of rate cuts by the BOK. The central bank has delivered four rate cuts since August last year, sending the key policy rate to a record low of 1.5 percent.

The BOK explained that the sharp fall in May came as household loans extended by lenders were transferred to the state housing agency under a government-led program aimed at easing household debt risk. Under the scheme, households were allowed to refinance their floating rate and short-term mortgage loans with fixed-rate and long-term loans.

Currently, most home-backed loans are non-amortized loans, which require borrowers to pay the lump sum principal upon maturity and are therefore prone to changes in lending rates.

By sector, banks' household loans increased by 1.6 trillion won, dropping from an 8.7 trillion-won increase in April.

Non-banking institutions saw a 1.3 trillion-won fall in the cited period, compared with a 1.4 trillion-won gain in April.

In the first five months of the year, South Korea saw a cumulative increase of 22.3 trillion won in household loans extended by financial institutions, nearly twofold the 12.1 trillion-won gain posted in the same period last year.

The latest data comes two days ahead of the central bank's monthly rate-setting meeting. In a survey by Yonhap Infomax, the financial news arm of Yonhap News Agency, all 17 analysts projected the BOK to leave the base rate unchanged at 1.5 percent. Sixteen of them said the BOK will likely hold the rate until the end of the year. (Yonhap)