Korean banks are expected to tighten their grip on home-backed lending in the third quarter as the regulator’s move to curb rising household debt will lead them to be wary of extending mortgage loans, the central bank said Tuesday.

An index gauging lender attitudes on mortgage loans came in at zero for the July-September period, compared with 6 tallied in the second quarter, according to a survey of 16 lenders conducted by the Bank of Korea.

The third-quarter data marked the lowest level since the index reached minus 13 for the fourth quarter of 2009, it added.

The lower the reading, the more likely that banks will tighten their restrictions on lending. A reading above zero means that the number of banks that will ease their grip on lending surpasses that of lenders planning to stiffen lending criteria.

“Banks are expected to be less lenient toward mortgage lending as the financial watchdog has called for lenders to refrain from competitively extending lending and is seeking to stem snowballing household debt,” said Shin Hyeong-wook, deputy director general of the BOK’s financial stability analysis team.

The Financial Services Commission said last week it will tighten banks’ loan-to-deposit ratios and push for mending their lending practices as part of efforts to stem the growth of household debt, which topped 800 trillion won ($749.8 billion) as of end-March.

Local banks expect households’ credit risks to hit a one-year high for the third quarter as growing household debt and rising interest rates are feared to sap their capacity to service debt, the BOK said.

An index measuring households’ credit risks, or the likelihood of borrowers being unable to pay back debt, came in at 13 for the third quarter, up from 9 tallied three months earlier.

The third-quarter data marked the highest level since 16 registered in the third quarter of last year.

Bank lending rates have been on the rise in tandem with rate hikes conducted by the central bank. The BOK has raised the key rate to 3.25 percent by a combined 1.25 percentage points since July last year.

Meanwhile, local banks are forecast to soften their control of lending for local smaller firms in the upcoming quarter despite the prospects for high credit risks.

An index measuring banks’ lending attitudes for smaller companies reached 25 for the third quarter, up from 22 tallied in the second quarter and the highest level since 25 in the first quarter of 2007.

“Bank’s lending to companies seemed to recover from the impact of the global financial crisis although it is too early to say that corporate loans are on the rising trend,” Shin said.

Local banks excessively extended lending to small and medium enterprises in 2006 and 2007 amid competition for asset growth. Such lending grew by 65 trillion won and 48 trillion won in

2007 and 2008, respectively, but the sharp brunt of the global financial storm caused SME loans to contract 1 trillion won last year after growing by 20 trillion won in 2009.

Korean lenders are estimated to have extended loans to smaller firms by around 14 trillion won so far this year.

An indicator gauging SMEs’ credit risks came in at 19 for the third quarter, up from 16 tallied three months earlier and the highest level since the second quarter of 2010.

The BOK said the high credit risk for smaller firms came as high oil prices and sluggish domestic demand are expected to crimp their corporate profitability. 

(Yonhap News)