Customers are seen at a loan counter at a bank in Seoul, Monday. Yonhap

Demand for credit loans is surging as people seeking to buy homes are looking for alternative ways to borrow funds from banks amid tightening mortgage loan policies.

Financial authorities said Thursday that they are closely monitoring the rising trend not only in mortgages but also in credit loans.

They are also exploring measures to curb a potential surge in credit loans.

The outstanding balance of credit loans at the five major banks — KB Kookmin, Shinhan, Hana, Woori and NH NongHyup — decreased by 214.3 billion won ($160 million) in June and 171.3 billion won in July, but surged by 849.5 billion won in August.

This surge is attributed to the rising demand for credit loans, as many banks raised their mortgage rates and reduced mortgage limits in August in response to the financial authorities' pressure to curb the rapid growth of household debt. This is leading borrowers to seek additional funds through credit loans.

The demand for credit loans is highly likely to continue growing this month. This is because, in addition to the banks' own tightening of mortgage policies, the second phase of stressed debt service ratio (DSR) rules was implemented by the government on Sunday, further reducing the mortgage loan limits.

The stressed DSR regulation adds an extra stress factor when calculating the principal and interest a borrower must pay relative to their annual income. This measure effectively lowers the maximum loan limits.

gettyimagesbank

The financial authorities are monitoring the situation for now, as the stricter DSR rules have just been implemented. However, in case the volume of credit loans continues to surge due to the tightening of mortgage regulations, they are also considering measures to rein in credit loans.

The authorities are reportedly reviewing a plan to shorten the maturity period of credit loans, which would lower the borrowing limit.

Applying the loan-to-income (LTI) ratio regulation to credit loans is also cited as an option. This regulation is used to prevent the loans from exceeding a certain percentage of the borrower's annual income.

Currently, major banks operate credit loan limits at around 150 percent of one's annual income.

However, through the LTI regulation, a plan to reduce this ratio to about 100 percent is being discussed, meaning the loans would only be allowed up to an amount equal to the borrower's annual income.

“As credit loans have yet to increase significantly, we will keep monitoring the situation before deciding whether additional measures are necessary,” said an official at the Financial Services Commission, the country's top financial regulator.

Meanwhile, KB Kookmin Bank announced also on Thursday that it will limit the maximum amount of new credit loans to within the borrower's annual income, starting next Monday. In its own regulations on such loans, the bank will include the amount of credit loans already taken from other banks in the limit calculation.

For example, a person with an annual income of 70 million won and no existing credit loans can borrow up to 70 million won from KB. However, if this person has already borrowed 30 million won from another bank, the maximum additional loan from KB would be limited to 40 million won.