Korea’s household debt hits all-time high

South Korea’s household debt hit a new high in the third quarter this year, data showed Thursday, posing a greater threat to the vulnerable economy anticipated to be hit by higher interest rates.

The Bank of Korea’s data showed that household credit rose by 38.2 trillion won ($32.3 billion) in the July-Sept. period to reach 1,295.8 trillion won at the end of September, the highest volume in the country’s history.

When added to the 7.4 trillion won household lending by banks in October, the total household debt exceeds 1,300 trillion won, reaching the level at a much faster pace than previously anticipated for this year.

The quarterly gain is also the largest since the central bank began compiling related data in 2002. From a year earlier, household credit soared 11.2 percent.

Household credit consists of household loans extended by financial institutions, such as banks and credit card companies and credit purchases at leasing businesses. Household loans rose 3 percent quarter-to-quarter to 1,227.9 trillion won as of the end of September. Credit purchases also went up 2.9 percent quarter-to-quarter to 67.9 trillion won.

The BOK attributed the continued rise in household credit to bigger loans extended by non-bank institutions such as the National Credit Union Federation of Korea and the Korea Federation of Community Credit Cooperatives.

“The demand for loans was re-directed from banks to credit cooperatives because banks recently began to apply a stricter screening process in lending,” said BOK’s financial statistics team head Lee Sang-yong.

The increased proportion of non-bank lending in the total household debt means the quality of household debt has worsened.

According to the BOK’s statistics, interest rates on household loans at NCUF and KFCC in September were 4.46 percent and 3.83 percent, respectively, higher than the average rate of 3.03 percent at first-tier banks.

Observers say the anticipated raise of the US interest rate at the Federal Reserve in December will lead to higher market interest rates, weighing on Korean households who have borrowed money on low interest rates and the government’s 2014 easing of mortgage regulations.

Heavily indebted households tend to cut back on spending, which leads to weaker domestic demand.

To curb household lending, the Financial Services Commission said the government will regularly conduct stress tests not only on banks but non-bank financial institutions involved in household loans.

The FSC will also introduce a new system using “debt service ratio” in December at financial institutions to analyze money borrowers’ repayment ability in advance. The DSR, published by the Bank for International Settlements, reflects the share of income used to service debt.

Meanwhile, the state-run think tank Korea Development Institute urged the government to return its loan-to-value and debt-to-income ratios back to the pre-2014 level.

In August 2014, the government had eased mortgage regulations by raising LTV from 60 percent to 70 percent, and DTI, from 50 percent to 60 percent, to prop up the then-slumping real estate market.

“Since the easing, the total household debt largely exceeded the gains in household income. It is desirable to curb household debt by restoring the (LTV and DTI) ratios to the previous level,” Kim Ji-seob, research fellow at the KDI, said in the report. 

By Kim Yoon-mi (yoonmi@heraldcorp.com)