By Na Jeong-ju
Staff Reporter
The central bank's short-term interest rate hike is expected to put borrowers at greater risks of default, deteriorating their ability to pay back debt amid stalled income growth and rising consumer prices, analysts said Friday.
A tighter monetary policy will raise interest payments for borrowers, as banks expand loans to households and companies in a bid to boost their interest income.
Policymakers have raised concerns about greater default risks as a result of surging interest rates, but outstanding loans to households and companies have continued to grow.
With the Bank of Korea (BOK) moving to raise its call rate further to absorb excess liquidity on the money market, more households and companies will find it difficult to cover interest payments in the coming months, analysts said.
``The central bank is likely to raise its key rate one or two more times this year if the economic recovery gains momentum and the won's gain against the dollar moves within its target range,'' said Ha Joon-kyung, an economist at the Seoul-based Korea Institute of Finance.
For some indebted households and companies, which are not capable of resolving their debts soon, a nightmare could be in the offing.
Following the BOK's call rate hike on Thursday, banks raised their interest rates for loans by up to 0.03 percentage points in unison.
The interest rate for 91-day certificates of deposit (CDs), to which most flexible-rate loans are tied, rose by 0.06 percentage points to 5.06 percent Thursday, the biggest one-day rise in almost one year.
If the call rate hike translates into rises in banks' lending rates, a household which borrowed 100 million won ($108,000) from a bank will shoulder an additional interest payment of 250,000 won ($270) per year.
The rate hike will also be a blow to many small and mid-sized enterprises (SMEs), which have borrowed heavily from banks in recent months.
In June, the amount of loans to SMEs rose to an all-time high of 8 trillion won. In the second quarter, more than 22 trillion won of loans were extended to SMEs, according to the BOK.
Companies' debt repayment capabilities have worsened in line with the rapid growth of corporate loans. The situation may be further aggravated if the Korean won keeps gaining strength against the dollar and oil prices rise further, denting corporate margins, analysts said.
``The problem is that corporate loans are growing rapidly despite slower growth in industrial output and facilities investment,'' a BOK official said. ``If the corporate loans keep growing without an improvement in corporate profitability, firms will be exposed to higher default risks. This will also be a significant burden for lenders.''
Economic think tanks have called for measures to protect households and companies from rising interest rates, saying their default risks will become greater if they continue to rise.
In May, the Samsung Economic Research Institute said credit default risks may reach a ``critical point'' in the latter half, causing a financial crisis almost of the same scale as the credit card bubble burst in 2002.
Last year, mortgages grew at a faster pace than income and other household assets as people borrowed more money from banks to buy homes on expectations that housing prices would continue to rise. However, the housing market has remained sluggish since late last year on the government's enforcement of stricter mortgage rules and weaker demand.