Rules on household lending by non-bank financial companies

South Korea will toughen rules on household lending by non-bank financial companies in an effort to put the brakes on its rapid growth, the financial regulator said Sunday.

Non-bank financial firms, including cooperatives and insurers, will be required to lower their loan-to-deposit ratios to less than 80 percent in two years and to increase credit loss provisions for high-risk loans, the Financial Services Commission (FSC) said in a statement.

Even as the average loan-to-deposit ratio at non-bank financial firms stands at 70 percent, 14 percent of South Korea’s 2,500 cooperatives have outstanding loans that account for over 80 percent of their deposits.

“To help the new policy’s soft landing, we will begin regulating the 14 percent of the cooperatives at the initial stage,” Jeong Eun-bo, the director general of FSC’s financial policy bureau, told reporters.

The regulator will ask non-banks to raise loan-loss provisions for high-risk loans and bar insurance companies from using mobile text messages or fliers to solicit new borrowers. It will also conduct asset quality tests on insurance firms with fast-growing household debts, it added.

The measures come as heavy household debts extended by banks and non-banks are feared to cripple the domestic economic growth.

South Korea imposed stricter lending rules on local banks in June 2011 to prod the lenders to raise the bar of household debts. The move, however, was criticized for having jacked up household lending at non-bank firms.

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