Korean government to impose stricter requirements on banks

The government will also guide lenders to increase the proportion of fixed rate loans and loans with repayment on installment basis.

The above measures centered on prudential risk management rather than direct credit controls. In fact banks should have no difficulties to meet the new LTD deadline, as the LTD ratio averaged in domestic commercial banks has already reached 103% as of April. The government stated that they could lower the cap on banks’ LTD ratio to below 100%, but considering it as a future option.

It seems that the authorities are reluctant to significantly tighten household credit which would risk depressing economic growth, while a further acceleration in credit growth from the current level is also unacceptable. A proper growth rate in household credit/debt should be about 5.5-7.5% (in line with household income or nominal GDP growth), far lower than the ten-year average of 13%.

Its current growth rate of 8.4% (1Q11) is still slightly excessive. Reflected in the real economy, private consumption growth shouldn’t return to the historical average of 4%, in our view. In the short term however, we still think consumption growth will rebound from a weak 1H, as inflation stabilizes and consumers’ purchasing power recovers.