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 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.

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.

“The growth rate of household lending at banks slowed after the June 26 measures, but the growth rate at non-banks increased,” said Jeong.

In the last few years, the growth rate of household debts at non-bank financial firms outstripped that of lenders. Outstanding household loans at non-bank institutions stood at 402.3 trillion won ($357 billion) as of the end of 2011, more than double from 193.8 trillion won at the end of 2004. In the same period, household debts at banks grew from 276.3 trillion won in 2004 to 455.9 trillion won at the end of 2011. 

(Yonhap News)