Loan delinquency rate reaches 11-month high

Price hikes weaken households’ ability to pay debts in July


Commercial banks saw the ratio of overdue household loans reach the highest level in 11 months in July, despite financial regulators’ countermeasures to curb lending growth.

The delinquency rate in banks’ household loans posted 0.77 percent in July, up from 0.72 percent a month before, the Financial Supervisory Service said Thursday.

This was the highest figure since it reached 0.78 percent in August 2010, representing the critical situation that outstanding household debts are approaching 900 trillion won ($833 billion).

Economists attribute the high delinquency rate to worsened capability of households to pay their debts as the pace of debt growth is surpassing that of income growth.

Data reported by the Bank of Korea show that the country’s gross national disposal income reached 287.6 trillion won in the first quarter, up 7.6 percent from the previous year.

Despite the growth of disposal income, the ratio of household credit to GNDI came in at 2.79, a gauge measuring the level of household indebtedness against disposable income, in the first quarter, higher than 2.76 calculated in the first quarter of 2010.

“A higher figure means a worsening capacity of the average household to pay back its debts,” a BOK official said.

The ratio reached the worst level of 2.83 during the first quarter of 2009 when the country was reeling from the impact of the 2008 global financial crisis.

Rising inflation is eating into households’ income growth and purchasing power, leading the nation’s domestic demand to grow at a sputtering pace.

The Korea Center for International Finance said the banking sector has gradually been recovering profitability and quality of assets since the global financial crisis. “But the growth in household debts could serve as a risk factor.”

The institution pointed to households’ growing burden of the higher interest rate on mortgage loans.

It also said about 30 to 40 percent of mortgage loans were for the purpose of investment or consumption rather than actual house purchases.

Financial regulators recently instructed banks to reduce their lending rate by setting guidelines and are to urge banks to stop evaluating branches based on their amount of household lending.

But economists say that a key issue is whether the nation would see a soft-landing in resolving the household debt woes.

“Household debt issue is certainly problematic. But it is undesirable for the authorities to lead more borrowers to the secondary financial companies,” said Hyundai Economic Research Institute economist Park Deok-bae.

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