As the financial authorities move to address the practice of routinely extending loans for multiple-home owners and push to tighten oversight of loans to rental business operators, banks are preemptively tightening internal controls on related lending. An independent department will regularly verify whether the rent-to-interest ratio (RTI) used as the basis for calculating the loan limit for rental business operators has been properly computed and will seek to report the results to management and the board of directors.
According to the financial sector on the 26th, banks that handle loans to rental business operators agreed to revise the "model code for individual business operator loans" to this effect.
Under the revised model code, banks must, going forward, use an independent internal control unit such as the inspection department to review at least annually the appropriateness of the RTI calculation and input for newly issued loans to rental business operators. RTI is an indicator that measures how much a rental business operator's rental income from a given property compares to the loan interest expense. It serves as the basis for calculating the loan limit for rental business operator loans.
Banks will also build and operate an RTI information review system at headquarters and upgrade their IT management framework to minimize input errors at branches. The results of appropriateness reviews and IT management will be reported regularly to management and the board of directors.
Currently, when banks handle loans to rental business operators, they are first executed with a 3–5 year maturity and then extended annually. Banks are known to calculate RTI only at the initial credit review and conduct only a formal check at maturity extensions. The financial authorities and the financial sector have recently reviewed the repayment methods and maturity extension procedures for loans to rental business operators and are said to be considering strictly applying RTI rules during maturity extension reviews. The banking sector's move to strengthen internal controls on loans to rental business operators is seen as a preemptive response to this.
The current RTI standard in the banking sector is 1.5 times in regulated areas and 1.25 times in nonregulated areas. In a regulated area, if a rental business operator's annual interest expense is 10 million won, it means the operator must have at least 15 million won in annual rental income to qualify for a bank loan. If stricter RTI reviews are implemented, operators whose rental income has declined may be asked to repay part of the principal during the maturity extension process as their limit is reduced. If the drop in rental income is large, an extension could be denied.
As of the end of last year, bank loans to residential rental business operators are estimated at 13.9 trillion won. The financial authorities believe around 11 trillion won of that comes due this year.