South Korea's central bank said Friday that household debt could become a potential risk factor for the economy as the rate of debt growth is continuing to outpace that of income.
The Bank of Korea (BOK) said in a report for the annual parliamentary audit that it is unlikely household debt will sour massively in the short term and the growth rate of household debt has slowed on the back of the government's efforts to lessen indebtedness problems.
However, the central bank warned that since household debt is still growing faster than income growth, household indebtedness could serve as a latent risk factor for the stable management of the economy.
The on-year growth rate of household credit, or credit purchases and loans, reached an average of 5.2 percent last year, compared with a 4.2 percent on-year gain of household disposable income, the BOK said.
Household debt grew 5.1 percent on-year in the first quarter and 5.5 percent in the second quarter, it added.
The high indebtedness of households is the main bugbear for Korean policymakers as it is feared to crimp consumer spending, which hurts economic growth. Korea's household credit totaled 980 trillion won (US$921.9 billion) as of the end of June, up 16.9 trillion won from three months earlier, according to the BOK.
The BOK expressed concerns that the weight of home lending from non-bank financial institutions rose, increasing debt-servicing burdens for households with low income and low creditworthiness.
It also said that the self-employed are holding high debt and borrowers from multiple financial institutions have increased, spawning concerns about the asset quality of local financial firms.
As for risks from volatile cross-border capital flows, the BOK said that it plans to aggressively seek measures to stabilize the financial markets by supplying liquidity if needed.
In October, the BOK revised down its 2014 estimate of the Korean economy to 3.8 percent from 4 percent while keeping its 2013 growth forecast at 2.8 percent.
The bank said downside risks are seen as outweighing upside risks to growth, citing uncertainties over the Federal Reserve's monetary stimulus tapering, U.S. fiscal impasses and the instability of oil prices, as negative factors for the Korean economy. (Yonhap News)
