Korea’s financial watchdog said Thursday it may require local banks to lower their loan-to-deposit ratio to the 90 percent range in a bid to stem excessive growth of household debt.

Lowering the loan-to-deposit ratio, a gauge of a bank’s solvency, was one of a set of measures to curb snowballing household debt unveiled on Wednesday. Household debt, which surpassed 800 trillion won ($747.3 billion) as of the end of March, is feared to put a drag on the economy by putting restraints on consumer spending.

“The government is mulling lowering the ratio step by step,” said a senior official at the Financial Services Commission.

The loan-to-deposit ratio measures the percentage of a bank’s loans against the amount of its deposits. A higher reading means that a bank extends more loans than it could raise funds.

Local banks are initially required to lower their loan-to-deposit ratios below the benchmark 100 percent by the end of 2013, but under the measures, the timing of meeting the requirement will be advanced to June 2012.

As of the end of March, 13 local banks’ loan-to-deposit ratios stood at 97.1 percent on average with numbers for some banks hovering above 100 percent.

“The government would review whether to further lowering the ratios after watching the growth pace of household debt,” he said, adding that if the ratio is cut by 10 percentage points, banks’ overall loans shrink by 100 trillion won.

The move comes as households’ capacity to service debt is deteriorating. South Korean households’ capacity to service debt worsened in the first quarter as debt increased faster than income, and rising interest rates are feared to further hurt households’ ability to repay debts. 

(Yonhap News)