Hasty household debt control can backfire on economy: BOK

Despite households worsening ability to repay debt, Korea should avoid implementing hasty control over the debt to prevent the nation‘s economy from entering recession, Bank of Korea said Tuesday.

The central bank said that slower-than-expected improvement in household income is failing to keep up to pace with fast-rising household debt. However, the BOK said stronger intervention to slash household debt can impede growth by imposing pressure on the market, especially the property market. 

“Concerning calls that we need stronger measures to tackle the household debt level, (BOK’s) basic stance is against inducing a drastic debt curb in a short period of time,” said BOK Deputy Governor Hur Jae-sung, at a press briefing on the financial stability report submitted to lawmakers.

In the first half of next year, BOK and financial regulators will implement a series of regulatory guidelines on household debt control, such as tightening borrowing requirements.

Hur expected the guidelines to slow down growth of household debt -- yet with criticism that household debt is growing at a far faster rate than disposable income.

As of the end of September, the country’s household debt stood at 1.166 quadrillion won ($993.1 billion), up 10.4 percent from a year ago. The household debt to disposable income ratio also rose to 143 percent, up 5 percentage points in six months.

The BOK’s parliamentary report came a week after it marked down the country’s potential growth rate to 3.0-3.2 percent.

According to BOK data, the financial debt level of senior householders aged 60 and over turned out to be the highest, with the average debt to disposable income ratio surpassing 200 percent.

The report estimated that in the 2010-2014 period senior householders cleared the highest amount of household debt, mostly by selling homes.

“Senior householders can trigger new risks in the property market in an attempt to deleverage their household debt, but this will not happen in the next one or two years,” said Cho Jeong-hwan, director general of BOK’s financial stability department.

Cho recommended that pension plans can be a way of inducing people to increase the possession of disposable income.

Meanwhile, the report saw that the overall financial system of the Asia’s fourth-largest economy remained stable, thanks to financial soundness in the financial institutions and foreign exchange sectors.

On the corporate level, however, BOK voiced concerns, citing the country lacks legislative support for clearing financially unsound companies. The corporate restructuring bill is still pending in the National Assembly, despite urgent calls from the financial authorities, including BOK Gov. Lee Ju-yeol and then-Finance Minister Choi Kyung-hwan.

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