Chairperson Kim Byeong-hwan of the Financial Services Commission (left) and Commissioner Lee Bok-hyun of the Financial Supervisory Service engage in conversation before the 4th plenary meeting of the National Assembly's investigation special committee into the alleged insurrection through the emergency declaration of the Yoon Suk-yeol government on the afternoon of Nov. 15 in Yeouido, Seoul. /Courtesy of News1

The head of the Financial Supervisory Service, Lee Bok-hyun, made comments warning against the concentration of policy loans such as the Didirimdol and Burtimok loans, causing a stir in the financial sector. It is unusual for the head of a financial authority to raise concerns about the supply of government-led financial products for low-income individuals.

During an executive meeting on the 14th, Lee noted that “the bank's own resource policy loan has increased by 180.8% since 2022, indicating a concentration phenomenon in household loans,” and added, “Considering the opportunity cost for banks, it may adversely affect revenue, so it is necessary to be aware of asset concentration risk and deterioration in soundness.”

Financial authorities had refrained from taking a stance despite several points being raised about policy loans being a major cause of the increase in household debt and rising housing prices. They appear to have been cautious in their comments due to concerns that this could clash with the Ministry of Land, Infrastructure and Transport's stance of expanding policy loans for housing stability. Previously, Lee emphasized that there was no difference in stance compared to the Ministry of Land, Infrastructure and Transport, which had stated in September of last year that there were no plans to reduce the supply scale of policy loans, saying, “We are communicating with the Ministry.”

It appears that the financial authorities, through Lee's comments, have put the brakes on the Ministry of Land, Infrastructure and Transport's expansion of policy loan supply as there seems to be little narrowing of differences on this year's supply scale. While the Ministry is insisting that the policy loan supply should maintain last year's level (55 trillion won), financial authorities reportedly argue that the supply scale should be adjusted to manage household debt. They plan to manage the increase in household loans within the projected nominal Gross Domestic Product growth rate (3.6% to 4.0%) for this year, which amounts to approximately 60 trillion won.

Banks seemingly welcome Lee's policy loan suspension in private. Policy loans involve banks offering loans at low interest rates on behalf of the government, with the government compensating the difference between general loan rates and policy loan rates. However, the compensation is not full, but up to 0.99 percentage points, so banks are hesitant to handle policy loans because they must bear about 1 percentage point of interest expense. Thus, they have no reason to welcome it. In December of last year, some branches of a commercial bank controversially suspended handling policy loans themselves.

Lee's comments have opened up the possibility of reducing the supply of policy loans, yet banks seem confused. Currently, a cautious stance predominates. A representative from a commercial bank said, “Even if the financial authorities grant a reprieve, we cannot ignore the Ministry’s gaze,” adding, “For now, we must continue to observe the trends to see what level the policy loan supply is confirmed at.”