ATMs at major banks in Seoul [Newsis]
ATMs at major banks in Seoul [Newsis]

South Korea's five largest banks have used up roughly 80 percent of their annual household loan quota, leaving only about 20 percent of permitted lending capacity with the second half barely underway. To stay within tightened household debt limits set by financial regulators, the banks are expected to take the drastic step of cutting mortgage loan caps — deploying every available tool short of an outright lending freeze. With the Bank of Korea also signaling an imminent benchmark interest rate hike, fears are growing that a full-blown credit cliff is becoming a reality.

As of Thursday, the combined household loan balance — excluding policy loans — at KB Kookmin Bank, Shinhan Bank, Hana Bank, Woori Bank and NH NongHyup Bank stood at 648.36 trillion won ($430 billion), according to financial industry data released Monday. That is up 3.38 trillion won from the end of last year, representing 78 percent of the 4.34 trillion won in total household loan growth the five banks are permitted for all of 2026.

Financial regulators tightened household debt management guidelines this year, lowering the target growth rate for household loans across all financial institutions to 1.5 percent from 1.7 percent the previous year. Banks were assigned correspondingly smaller loan quotas than last year.

Despite the tighter caps, household lending at the five banks actually declined early in the year, as sweeping restrictions — including mortgage loan limits — reduced new loan originations. The combined household loan balance fell from 644.98 trillion won at the end of last year to 638.8 trillion won at the end of the first quarter.

The surge began in May. As the Kospi crossed the 8,000 mark, a stock market rally fueled a sharp rise in unsecured credit loans, driving overall household lending higher. By the end of May, the five banks' combined household loan balance had climbed to 643.11 trillion won, up about 5 trillion won from the end of March. Demand from buyers rushing to purchase homes before further restrictions kicked in has kept the upward trend going since then.

With less than 20 percent of the annual quota remaining just as the second half begins, the industry is preparing to impose stringent loan management measures over the rest of the year to comply with regulatory limits.

Financial regulators have warned they will impose heavy penalties on any financial institution that fails to meet this year's household loan growth targets. KB Kookmin Bank, which exceeded its target last year, was assigned the lowest household loan growth quota among major banks for this year as a result.

The most likely next step is an additional reduction in loan limits. Banks have already restricted access to mortgage credit guarantee products — including mortgage credit guarantees and mortgage credit insurance — that indirectly cap mortgage amounts, and have imposed limits on loan originations through mobile apps and loan brokers. For unsecured credit loans, a 100 million won ceiling is already in place, and unused credit lines on overdraft accounts are being reduced at renewal.

KB Kookmin Bank fired the opening shot Friday, slashing its mortgage loan cap in the Greater Seoul area and other regulated zones from 600 million won to 300 million won — half the previous limit — and introducing a new 300 million won ceiling in non-regulated areas as well. When one bank tightens its limits while all lenders are subject to the same overall quota, borrowers inevitably flood into rival banks.

"In the case of mortgage loans, the balance does gradually shrink when we scale back originations because they are repaid in equal principal-and-interest installments," an official at a major commercial bank said. "But in terms of the sheer intensity of the restrictions, you could say we are one step short of a full lending freeze." A senior financial regulator echoed that assessment, saying banks "have in effect used up almost every regulatory tool available to them."

As banks tighten lending, second-tier financial institutions — including credit cooperatives, credit card companies and savings banks — are also expected to raise their lending bars by tightening loan screening or raising interest rates. These lenders received smaller household loan quotas than last year as well, and if borrowers turned away by banks pile on top of their existing customers, they will be unable to absorb the demand. Regulators have already imposed a zero-net-growth cap on household lending this year at Saemaul Geumgo and three savings banks that exceeded their targets last year — a severe sanction. The credit cliff that had been feared since the start of the year is now materializing.

The outlook is set to worsen further for ordinary borrowers as the Bank of Korea signals a benchmark interest rate hike. Markets expect the Bank of Korea's Monetary Policy Board to kick off a full rate-hike cycle as early as this month, a scenario in which fixed-rate mortgage rates at commercial banks could easily surpass 8 percent per annum.


hyuk@heraldcorp.com
forest@heraldcorp.com