Household debt soars along with number of borrowers at risk of default

The Korea Times

The Korea Times

Finance

Tue, September 26, 2023 | 18:07

Economy

Household debt soars along with number of borrowers at risk of default

Posted : 2022-09-15 16:44

Updated : 2022-09-16 07:52

Soaring debt pushes more borrowers to the edge

By Yi Whan-woo

Household debt in Korea surged to a record 1,869.4 trillion won ($1.33 trillion) in the second quarter, while the number of borrowers who are at risk of default is also rising sharply due to accelerated hikes in the benchmark interest rate in recent months.

According to the Bank of Korea's (BOK) preliminary data, total household debt, including the amount of credit for the purchase of goods and services, increased by 6.4 trillion won from three months earlier to 1,869.4 trillion won at the end of June.

It marked a new record since related data started to be compiled in 2003, and also marked a gain for the 38th consecutive quarter.

BOK data also showed 4.46 million people borrowed from multiple banks in the first quarter.

They accounted for 22.4 percent of those who took out personal loans, up 0.3 of a percentage point from the end of 2021 and the highest level seen since 2012 when relevant data began to be compiled.

Of the 4.46 million, those in their 30s or younger accounted for 26.8 percent ― the highest of all surveyed age groups.

"It is noteworthy that that they are low-income earners," an industry source said.

Correspondingly, separate data from the government-affiliated Credit Counseling and Recovery Service showed that a surging number of borrowers were granted a 50 percent cancellation of principal through a state-run debt relief program over the years ― 19,943 in 2018, 22,404 in 2019, 31,970 in 2020 and 37,727 in 2021.

Those borrowers were mostly in their 40s and 50s, with the average debt cancellation amounting to 37.2 million won.

The number this year stands at 21,501 as of July, and is expected to grow as the government is geared toward introducing a new debt relief program worth 30 trillion won aimed at salvaging heavily indebted small business owners and self-employed people.

"The targeted borrowers are those struggling to pay back principal that is due within a year or two and are at risk of default if they do not receive support," another industry source said.

The source reckoned that more borrowers are struggling with repayments as interest rates are rising quickly, with the BOK raising the key rate for the fourth month straight in August.

The key interest rate currently stands at 2.5 percent, up from 1.25 percent in January.

"Such hikes are especially stoking concerns, considering that borrowers took out loans on variable interest rates," a financial industry analyst said, noting that 78.4 percent of household loans are based on such fluctuating rates as of July.

A variable interest rate, as opposed to a fixed interest rate, fluctuates over time in accordance with the benchmark interest rate.

The July reading marks the highest since March 2014 when the rate was at 78.6 percent.

Under the circumstances, the financial stress index (FSI), a measure of the degree of financial stress facing a nation's economy, increased to a 20-month high of 13.

A reading higher than eight is perceived as a sign demanding caution.

Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho downplayed concerns over household debt last week. "It is not at a serious level to dent fiscal health," he said.

yistory@koreatimes.co.kr