Financial authorities launched an investigation over local banks to assess the solidity of their loan approvals for apartment buyers, industrial sources said Sunday.

The Financial Supervisory Service started the solidity crackdown last Wednesday starting with two state-run banks, including Woori Bank and Nonghyup Bank. The financial watchdog will continue investigations into other major lenders and some of the large-scale regional lenders, with a focus on the soundness of the lenders’ loan evaluation and risk management.

The crackdown on apartment-based loans came amid rising demand for newly built apartments, as South Korea’s central bank has kept the key rate cut at a record-low 1.50 percent for four straight months since June.

The targeted “apartment group loan” stands for a bank loan for multiple buyers of the same group residence, such as apartments and flats. This type of loan typically allows house buyers to borrow up to 70 percent of the intermediate and final installments to purchase new apartments on identical borrowing conditions, without individual evaluation of repayment abilities.

The apartment group loans require the apartment builders to guarantee the apartment buyers’ repayment abilities.

The group loans’ risks has led to rising concerns that default in such group loans can trigger a domino effect of massive bad debts and household debt.

“We have spotted possible signs of irresponsible parceling out by apartment builders to take advantage of the recent boom in housing market, which calls for preventative measures,” an FSS official said.

By Chung Joo-won (joowonc@heraldcorp.com)