The phase 3 stress Debt Service Ratio (DSR) will be implemented in July. Financial authorities will announce detailed plans this month, and from phase 3 on, the second financial sector will also become subject to regulation. The stress DSR is a system that calculates the loan limit by adding an additional interest rate (stress rate) to the loan rate, reflecting the possibility of interest rate fluctuations. When a stress rate is applied, the loan limit inevitably decreases. It appears that the implementation of the phase 3 DSR in the second financial sector will inevitably impact mid- to low-credit borrowers who need survival loans during an economic downturn.
According to the financial industry on the 8th, Kim Byeong-hwan, the chairman of the Financial Services Commission, noted in a monthly press briefing held the previous morning that he would release the specifics of the phase 3 stress DSR within this month. The financial authorities are reviewing the implementation of the phase 3 stress DSR from July 1. Particularly, this phase 3 includes the second financial sector, which was not previously included, such as insurance, cards, and capital.
In the current phase 2, stress rates are only applied to mortgage loans and credit loans in the banking sector and to mortgage loans in the second financial sector. However, starting from phase 3, stress rates will apply to all household loans in both the banking and second financial sectors. The interest rate level is expected to rise nearly double from the existing phase 2's 0.75 percentage points to 1.5 percentage points (tentative) in phase 3.
The second financial sector has not been subject to stress DSR regulations until now. However, the financial authorities decided to include it in the regulations starting from phase 3 to strengthen loan soundness and reduce default risks in the second financial sector. Additionally, discussions have been ongoing about the necessity of applying the regulations, as loans in the second financial sector impose higher interest rates on borrowers. When phase 3 is implemented, regulations that were mainly applied to mortgage loans will also be introduced for credit loans, auto financing, and installment payments.
In the second financial sector, it is expected that loan execution will inevitably become difficult when the phase 3 regulations are implemented as scheduled in July. With recent housing demand and increases in household loans, there are also forecasts that last-minute demand will surge before limits decrease, coinciding with a trend of lowering interest rates.
Particularly, there are concerns that the borrowing capacity of vulnerable financial consumers, such as mid- to low-credit individuals and self-employed workers, may shrink amid the ongoing economic downturn. In the second financial sector, the proportion of mid- to low-credit borrowers who borrow living expenses is overwhelming, and if the phase 3 DSR regulations make loan assessments more stringent, obtaining additional new loans or extending existing loans may become challenging.
Recently, as the economic downturn persists, loans referred to as 'recession-type loans,' such as card loans and insurance contract loans for ordinary citizens, are on the rise. According to the Korea Credit Finance Association, the balance of card loans reached 42.372 trillion won at the end of the last quarter, marking the highest amount ever recorded, while the balance of insurance contract loans also reached 71.6 trillion won at the end of last year, setting a record high.
A second financial sector official stated, "While we understand that the DSR regulations are measures to manage household liabilities stably and will comply with them, the burden will be increased for mid- to low-credit borrowers," adding, "Since the financial authorities have been strengthening assessments for card loans, which act as a cash window for ordinary citizens, since the end of last year, when phase 3 is implemented, the loan amounts available to financial consumers are bound to decrease."