[NEWS IN FOCUS] Banks Freeze New Loans As Loan Growth Limits Are Set

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Loan and loan announcement in front of a commercial bank in Seoul on Monday.  Banks are tightening new loans under pressure from the government. [YONHAP]

Loan and loan announcement in front of a commercial bank in Seoul on Monday. Banks are tightening new loans under pressure from the government. [YONHAP]

Lending is sharply narrowing, some banks are suspending lending by order of the financial authorities.

NH Nonghyup Bank was the first to pick up the punch bowl, announcing on August 19 that it will suspend all new loans until the end of November.

Only unsecured loans will be issued, and even this lending will be limited.

The Woori Bank followed the next day, temporarily suspending lending until the end of September. The bank says it has already reached the maximum amount it can provide in the third quarter.

Others have not announced such moves, but over the weekend there were concerns that other financial companies might follow suit.

“This is the first time that new mortgage loans have been discontinued,” said Lee Kyung Ja, an analyst at Samsung Securities. “Although banks have already significantly reduced lending.”

According to the analyst, if the suspension is extended to other banks, this could lead to an increase in the rates of non-bank financial institutions, since borrowers will have no other choice.

The move comes after financial authorities previously ordered banks to curb new lending growth at 5 percent year on year.

In the case of NH Nonghyup Bank, loans increased by 7.1 percent last month.

There were also reports that financial authorities – the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS) – last week asked non-bank financial institutions such as savings banks and cooperatives to do the same.

As worries over the weekend increased over dwindling loan opportunities, the financial authorities tried to dampen panic and fear on the part of loan seekers, especially with the approaching relocation season, which usually falls in the fall.

In a statement released on Monday, the FSC stressed that the likelihood of a temporary suspension of NH and Woori Bank’s lending to other financial companies is unlikely.

“Action was taken against those who exceeded their original targets,” the statement said, referring to NH by name. “Most financial companies, including large commercial banks, still have a place.”

The government recently warned against raising interest rates by the Bank of Korea (BOK), which could lead to higher asset maintenance costs and lower property prices.

FSC Chairman Eun Sung Soo said on July 28 that the government would have no choice but to tighten household loans in the second half to keep the annual increase in household loans at 5 to 6 percent.

“In order to stay within 5-6 percent by the end of the year, in the second half of the year it is necessary to manage the increase in the range of 3 to 4 percent.” Eun talked about the rise in home loans.

Household loans totaled 1,666 trillion won as of the first quarter of this year, up 9.5 percent from last year, according to the central bank.

On Tuesday, the central bank will announce second-quarter consumer loans.

Ko Seung Bom has been selected as the new FSC Chair. Until recently, he was a member of the central bank’s monetary policy committee and is considered a hawk.

Ko was the only one to vote for a rate hike in July. Since his appointment, Ko has publicly called for a tougher approach to household debt management.

The central bank’s monetary policy committee is meeting on Thursday to set rates. For an increase of 1 percentage point, borrowers must pay an additional 12 trillion won.

But there are those who believe the central bank is likely to keep interest rates up, given the increasing difficulties many small businesses and households face as the government has expanded its regulation of social distancing.

The government over the weekend extended the current level of social distancing by another two weeks, although it increased the number of people who can gather after 6 p.m. from two to four under certain conditions.

“We expect the monetary policy committee members to maintain rates for August,” said Kang Seung Won, an analyst at NH Investment & Securities. “The problem is Covid-19.”

“Our fundamentals are strong, including external credit ratings as well as financial strength,” Vice Finance Minister Lee Yeog Weon said Monday. “However, there are also uncertainties, including a resurgence of Covid-19 not only at home but abroad, as well as a decline in US activity.”

LEE HO-JONG [lee.hojeong@joongang.co.kr]



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