Government’s solution works no magic

The government’s ambitious measures to rein in excessive household debt growth seem to remain far from effective despite financial regulators’ guarantees of a soft landing.

Microcredit cooperatives including the National Credit Union Federation of Korea, better known as Shinhyup, and the Korean Federation of Community Credit Cooperatives are adding fuel to the already serious household debt problem. / Korea Times file

Household debt growing; credit cooperatives in trouble

By Kang Seung-woo

The government’s ambitious measures to rein in excessive household debt growth seem to remain far from effective despite financial regulators’ guarantees of a soft landing.

Making matters worse, micro-credit cooperatives including the National Credit Union Federation of Korea (NCUFK), better known as Shinhyup, and the Korean Federation of Community Credit Cooperatives (KFCCC) are thrusting themselves into the limelight with possible insolvency.

According to sources in the banking industry Thursday, three major lenders — Shinhan, Woori and Hana — recorded an increase of 315.7 billion won ($297.39 million) in household loans between June 30 and July 14 — pushing the debt burden up from 172.56 trillion won to 172.88 trillion won. Shinhan expanded its loans by 248.7 billion won, Woori by 42 billion won and Hana, 25 billion won.

In terms of home-backed loans, which make up a large portion of household debt, two players showed increases, as Woori lent 106.1 billion won and KB 45 billion won. Shinhan and Hana reduced their housing loans by 244.9 billion won and 17 billion won, respectively, but Shinhan excluded studio apartment-related mortgages.

Given that June and July are seen as the off-season for home equity loans, the loan growth shows that the government’s actions to tackle soaring household debt are not working.

The frustrating figures came after Seoul stepped in to help curb soaring household debt on June 29, unveiling plans to assist people in repaying their loans and suppress irresponsible lending by banks.

According to the Bank of Korea (BOK), less than three years after surpassing 500 trillion won, the debt amassed by Korean households reached a new high of 801.4 trillion won as of the end of the first quarter of this year.

The government plans include promoting fixed interest rates for home-backed loans, which mostly have floating rates, and establishing new guidance on the criteria lenders should consider before offering loans to customers.

It also intends to encourage more households to mend the practice of only repaying interest on their mortgages without paying off the principal during a grace period.

Currently, only around 5 percent of home loans are extended this way, but the Financial Services Commission (FSC) aims to boost the figure to 30 percent by 2016.

According to an official in the banking sector, borrowing applications and inquiries have shown little signs of slowing down even after the government’s announcement of the measures.

In addition, there is little interest in loans with a fixed lending rate.

Earlier this month, KB offered mortgages with 30-year low fixed-interest rates, but these account for just 27 percent, or 14.7 billion won as of Friday, of the 45 billion won increase.

“Following the government’s plans, banks are putting their heads together to promote fixed-rates for housing loans, but not many clients are showing interest in them,” the official said.

“It appears that there might make no difference in the size of lending even if we offer fixed-rate mortgage products.”

The Financial Supervisory Service (FSS) is discussing details of the debt plan with banks, but the negotiations are in stalemate due to opposition by the lenders, which complain that it is not easy to lower rates of the fixed-rate loans due to the potential decline in net interest margins. Interest income represents about 80 percent of banks’ profits.

Another ticking bomb

While the FSC and FSS are chiefly focusing on banks, there are growing concerns over the bankruptcy of credit cooperatives.

According to the BOK, the outstanding balance of household loans from the KFCCC stood at 29.74 trillion won as of April, up 59.8 percent compared to the same period two years ago.

Shinhyup also posted a high growth in lending with 52.1 percent during the same period to total 21.26 trillion won.

Both institutions’ gains were much higher than that of banks, which tallied 11.2 percent, meaning that needy people looked to those credit cooperatives with less strict regulations.

“The FSS will strengthen risk management of credit cooperatives by raising their ratios of loan-loss provision,” Governor Kwon Hyouk-se said last month.

The expanded tax deduction in January 2009 led to a sharp increase in savings inflow at the non-banking players, which was transferred to loans, according to the FSS.

The financial industry estimates that credit cooperatives’ main clients are those with low credit ratings and self-employed business people, so if rate hikes and economic slump continue to hover around, the institutions risk a credit bubble, as did local savings banks, hit hard by soured constructions loans.

The sector’s default rate reached 4.52 percent in the third quarter of last year, up 0.71 percentage points compared with the previous year, with overdue loans rising 36 percent year-on-year.

Observers say that the financial regulators should control loan expansion from the non-banking sector because households can be exposed to more risks when interest rates rise.

“Household debt troubles can be more serious in the non-banking sector than in the banking industry. The financial regulator needs to take a pre-emptive action to prevent the problem from expanding,” said a Seoul-based economist.