Korea’s financial regulator said Wednesday it will require credit card companies to set aside more loss reserves against credit card loans amid growing concerns over burgeoning household debts.
The measures to limit credit card companies’ lending and prop up their financial health came after the sector recorded sharp growth in household loans last year. Mushrooming household debts have been cited as a potential risk to the economy.
The tightened regulations by the Financial Services Commission will oblige credit card firms to put up loan-loss reserves equivalent to 75 percent of credit card loans that are three to six months overdue, compared with the current level of 60 percent.
The supervisory reserve ratios on loans that are overdue three months or less will also be revised up, according to the statement by the FSC.
The watchdog plans to enforce the new guidelines from June, according to the FSC statement.
“The new measures, which will increase costs of loan-loss reserves against credit card loans, are expected to limit credit card firms’ heated race to boost card issuance,” the FSC said in the statement.
The FSC estimated that the new requirements will likely have the country’s five credit card-only companies set aside a combined 211.7 billion won ($191.5 million) in additional loan loss provisions.
The country’s high level of household debts is feared to pose a threat given that the central bank’s increasingly tightening stance may drive up borrowing costs, impairing households’ loan repayment ability.
Local financial companies’ household lending reached 746 trillion won as of the end of 2010, with credit card firms’ household loans, excluding credit purchases, accounting for 3.7 percent of the total, according to the FSC.
