Individual borrowers will have to undergo stricter assessments when they apply for bank loans under new guidelines to curb the nation’s household debt.

Banks will be instructed to take borrowers’ redemption capability into greater consideration than their collateral from next year, said financial regulators, the Finance Ministry and the Bank of Korea said in a joint statement Wednesday.

Their policy reportedly reflected the estimate that the record-high level of outstanding household loans ― worth about 1.2 quadrillion won ($1 trillion) ― was due mainly to a spike in mortgages or loans for living expenses secured against their houses.

Turning from the current screening system, banks will prioritize the annual income level of loan applicants. “Withholding tax receipts issued by the National Tax Service will hold more significance,” said an official of the Financial Supervisory Service.

In addition, more borrowers will see the maximum grace period ― in which they only pay interest ― shortened to less than one year from the current range of between three and five years.

The authority also plans to induce loans based on floating interest rates to fixed rate-based loans starting this year.

Its target is to raise the ratio of fixed rate-based loans from the current 20 percent to 35 percent by the end of this year, and to more than 40 percent in two years.

Further, borrowers, who had already taken out loans on the basis of eased regulations in calculating debt-to-income and loan-to-value limits, will be instructed to start principal-redemption by installments as soon as possible.

“The lending with relatively high DTI and LTV ratios is placing a (heavy) burden on both financial firms and borrowers,” said the FSS official.

Despite the coming tough stance on the loan assessment process, officials predicted that the negative impact on private consumption would be restricted. They said the household sector’s consumption capacity would expand in the long term.

Meanwhile, the series of countermeasures unveiled could possibly face backlash from consumer advocates as it is the government that has eased a variety of regulations on housing-collateralized loans over the past few months or years in its alleged bid to invigorate the property market.

Further, the Bank of Korea is believed to have played a part in the nation seeing reckless borrowing as the central bank cut the key rate twice this year, in March and June, to bring it to a record low of 1.5 percent.

“From last year, doldrums in the real estate market and the necessity of boosting the economy came under spotlight by government officials. This has been linked to active bank loans to individuals,” said an employee in the financial industry.

Commenting on the timing of the tougher loan screening, set to start early next year, and a possible rise in the benchmark rate, he forecasted that many households may hurry to make loan applications before the end of this year, against the aims of the regulators’ guideline.

By Kim Yon-se (kys@heraldcorp.com)