South Korea's government said Wednesday it will prod local lenders to extend fixed-rate amortized loans and further scrutinize borrowers' repayment ability as part of efforts to stem a sharp rise in household loans amid a potential U.S. interest rate hike.
  

The set of measures came as the ballooning household debt can be a bugbear for Asia's fourth-largest economy, which is also facing a double whammy of sagging demand and a slump in outbound shipments.
  

The amount of the country's household debt extended by banks and non-banking institutions reached a record high of 1,099 trillion won (US$948 billion) as of end-March, data from the Bank of Korea showed, sounding an alarm for policymakers, as low borrowing costs spurred the demand for loans.
  

According to the measures unveiled by the Financial Services Commission, the financial authorities will encourage local lenders to handle more fixed-rate and amortized loans, instead of floating-rate mortgages, as borrowers are required to repay loans from the beginning of the contract period and have a lower risk of financial volatility.
  

Nearly 70 percent of home-backed bank loans are non-amortized loans in Korea, requiring debtors to pay only interest in the contract period and pay back the lump sum principal upon maturity. Such loans are heavily susceptible to changing interest rates.
  

The FSC, the country's financial regulator, said it will drop the rate to about 40 percent by 2017.
  

The regulator pumped nearly 40 trillion won into a government-backed loan scheme in late March to help debtors convert their short-term floating-rate mortgages into longer fixed-rate ones. More than 330,000 borrowers have benefited from the loan program, according to the FSC.
  

The FSC said local banks will also introduce a more sophisticated screening process on loan applications starting in January, focusing on the assessment of a borrower's debt repayment ability rather than the value of the collateral.
  

They must check income verifications issued by the state tax agency and the national pension bureau in order to assess the borrower's ability to repay more accurately.
  

"Given the soundness of household debt, the possibility is low that household debt risks will cause a systemic risk," said Sohn Byung-doo, director-general of the Financial Policy Bureau at the FSC.
  

"However, the government needs to take pre-emptive and comprehensive measures in response to internal and external risks, such as a U.S. interest rate increase and the following impact," he said.
  

Sohn said the government's policy is aimed at lowering debtors' debt-servicing burdens and helping them steadily repay loans by changing the structure of mortgages.

Household loans increased 7.3 percent on-year in the first quarter of this year, quickening from the 6.5 percent and 6 percent in 2014 and 2013, respectively, according to the central bank data.
  

The recent pick-up came on the back of policy efforts to revive the sluggish local demand, especially in the real estate market and the central bank's rounds of rate cuts.
  

In August, the finance ministry eased the loan-to-value ratio and the debt-to-income ratio, both aimed at widening access to home mortgages, while the central bank has slashed the key rate by one percentage point over the past year to a record low of 1.5 percent.
  

As the United States keeps giving signs that it will raise its key rate later this year, household debt has been a pain in the neck for local policymakers as it stunts consumer spending and weighs on South Korea's economy, which has been slowing in recent years.
  

Experts said the latest measures might be effective in changing the practices in the loan screening process but are not enough to curb the pace and downsize the amount.
  

"It can help improve the structure of our household mortgages as people will likely refrain from taking out massive amortized loans from the beginning," said Lee Jun-hyup, a senior researcher at the Hyundai Research Institute. "But the government didn't come up with measures to make the growth pace mild."
  

He suggested raising the LTV and DTI ratios in order to reduce the total amount of household credits.
  

"The DTI restriction is the direct and essential tool to curb the household debts," said professor Park Chang-gyun at ChungAng University. "When the government strengthened the DTI regulation in 2007, mortgages decreased to a notable extent." (Yonhap)