Household debt threatens bank industry

BOK report shows debts surpassed 800 trillion won for the first time in Q1 of the year


Snowballing household debts have emerged as a main factor undermining financial status of the middle- and low-income brackets of the local banking industry.

According to the Bank of Korea, the nation’s household debts have surpassed 800 trillion won for the first time during the first quarter of the year.

Outstanding household credit came to 801.4 trillion won, up 6 trillion won at the end of March from three months earlier, the central bank reported.

Moody’s Investors Service picked the mounting household debts as one of grave risks that might threaten Korea’s banking industry.

Citing the global rating agency’s report, 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 nation saw its ratio of disposable income to financial debts rose from 153 percent in 2009 to 157 percent in 2010, while the gross domestic product to household debt ratio has been worsening consistently since 2004.

The KCIF said that that 30 to 40 percent of mortgage loans are for the purpose of investment or consumption rather than actual house purchases.

It stressed that the situation could pose a problem in coming years.

The BOK said household lending by local financial companies reached 752.3 trillion won at the end of March, up 6.3 trillion won from the preceding quarter.

In the first quarter, banks’ home-backed lending, which accounts for a majority of banks’ loans, grew by 5.4 trillion won on-quarter to 289.9 trillion won, it added.

Credit purchases stood at 49.1 trillion won as of end-March, down 300 billion won from the preceding quarter.

Experts say households’ mounting debts may trigger critical social woes as their capacity to service debt would be dented as interest rates rise.

The central bank has raised borrowing costs four times from a record low of 2 percent since last July in an effort to normalize its loose monetary policy stance and tame inflation.

As part of the government’s countermeasure to curb household debts, policymakers are tightening rules on loans for home purchases amid growing concerns that rising household debts could emerge as a drag on the nation’s economic recovery.

The plan, announced jointly by the finance, public administration and land and construction ministries, however, calls for the government to lower acquisition tax rates for home purchases in a bid to bolster frozen transactions in the property market.

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