Watchdog set to toughen criteria for home-backed lending

(ATTN: ADDS more details about "put-back options" from para 8)
SEOUL, July 3 (Yonhap) -- South Korea's financial watchdog plans to strengthen
its monitoring of home-backed loans and toughen lending criteria if the housing
market shows signs of jitters, its head said Friday.

In an effort to find revenue sources amid a protracted economic slump, local
banks have been scrambling to increase their mortgage lending this year, stoking
worries about an unusual surge in housing prices.
"The government plans to let banks beef up risk management for loans to smaller
firms and households," Chin Dong-soo, chairman of the Financial Services
Commission (FSC), said in a forum. "The watchdog will draw up preemptive measures
by keeping a close tab on mortgage loans and stiffen lending standards if
concerns over market unease mount."
Market concerns rose as ample liquidity, caused by the central bank's aggressive
monetary easing steps, could push up consumer prices and spark asset inflation
down the road when the local economy begins to pick up.
According to the watchdog, bank mortgage lending surged by a monthly average of 3
trillion won (US$2.36 billion) this year, similar to levels seen in 2006 when
lenders were scurrying to extend home-backed loans.
In a bid to curb soaring housing prices in 2006, the government stiffened
regulations on home-backed lending. Under the toughened rules, banks can extend
mortgage lending amounting to 40 to 60 percent of the value of a residence.
Borrowers' annual repayment of interest and principal should not exceed 40
percent of their yearly gross income.
On Tuesday, Kim Jong-chang, governor of the Financial Supervisory Service, said
the watchdog plans to strengthen its monitoring of home-backed loans, but will
take a cautious approach toward strengthening rules for such lending.
Meanwhile, Chin said the FSC would consider looking into banks' funding practices
in mergers and acquisitions, but ruled out imposing a direct regulation on
exercising "put-back options."
The issue emerged as Kumho Asiana Group has faced severe a liquidity squeeze
after buying top builder Daewoo Engineering & Construction Co. for 6.42 trillion
won in 2006.
The deal was jointly funded by banks and other financial firms and Kumho offered
a put-back option under which it promised them it would buy back the builder's
shares by the end of this year if the stock price fell below 32,000 won.
Deepening financial turmoil has sent its shares sharply lower, amplifying
concerns about its liquidity.
"There is the need to look into the issue to stem possible deterioration of
banks' financial health," Chin said. "If banks as financial investors were
granted put-back options with favorable conditions, in the short term, they will
be good for lenders. But if a company faces some problems after a takeover, it
could dent banks' financial soundness as well."
sooyeon@yna.co.kr
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