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South Korea Adopts Stricter Lending Rules as Household Debt Hits 2-Year High

South Korea’s financial regulatory authority has announced a series of tightened credit regulations aimed at curbing the nation’s escalating household debt. The move comes in response to growing demand for home loans, which has propelled household borrowing to its highest level in two years, particularly evident in August.

The Bank of South Korea (BOK) recently disclosed that the total amount of household bank borrowing reached a substantial 1,075 trillion won, equivalent to $810.94 billion, at the close of August. This marked a monthly increase of 6.9 trillion won. Notably, the August surge in household debt surpassed the 5.9 trillion won increase observed in July and stands as the most substantial monthly increment since July 2021. The trajectory of household borrowing has been consistently upward since April.

The surge in household debt prompted swift action from South Korea’s Financial Services Commission (FSC), which convened a meeting on September 13th with relevant government ministries and agencies to address the issue. The objective of the meeting was to explore effective strategies to curb the expansion of household debt.

The FSC announced its intent to implement measures aimed at preventing the misuse of long-term home loans. These measures include imposing stricter debt-to-service ratios for floating rate loans and enforcing more stringent eligibility criteria for temporary housing loans, aligning with government policies.

In August, housing loans experienced their fifth consecutive month of expansion, reaching 7 trillion won, marking the highest level since February 2020. In contrast, other categories of loans decreased by 100 billion won in August, continuing a 21-month streak of decline.

South Korea’s decision to adopt stricter lending criteria underscores the nation’s commitment to maintaining financial stability and safeguarding against the risks associated with excessive household debt. As South Korea grapples with the ongoing challenge of balancing economic growth with responsible lending practices, these regulatory changes will play a pivotal role in shaping the nation’s financial landscape in the months to come.

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