By Kim Tong-hyung
Credit card debt is poised to reach a new peak as Koreans are trying to cope with stagnant wages and fund the rising cost of living, official figures show.
Household credit card spending, including transactions, loans and cash withdrawals, topped 540 trillion won (about $478 billion) in 2011, according to estimates by the Bank of Korea (BOK) and the Credit Finance Association.
The figure represents a dramatic increase from 493.7 trillion won the previous year and the highest since 619 trillion won measured in 2002, when the country was reeling in the aftermath of a popped credit bubble.
At the same time, credit card delinquency has jumped to levels last seen during the late-1990s financial crisis, which could be taken as a warning that the day of reckoning may be near.
By a broader measure, Korea’s household debt is now tallied at over 1 quadrillion won, which means consumers here owe more money than the economy generates in an entire year.
Attempting to claw away at the consumer debt mountain, the government has been tightening lending at commercial banks. But the move appears to be backfiring by channeling more people toward non-banking sources of credit and their crippling interest rates, as the recent credit-card statistics suggest.
Borrowing from credit card companies and hire purchase providers reached 38.2 trillion won as of last September, the highest since 39.4 trillion won in the third quarter of 2003.
The rate of credit card delinquency was measured at 1.8 percent between January and October last year, the highest since the same figure seen in 2008, when Lehman Brothers collapsed and mayhem broke loose.
“With the entry barriers at banks getting higher, an increasing number of financially precarious people are flocking to secondary lenders and credit cards. This suggests that the household debt situation could deteriorate severely if the economy takes a turn for the worse,” said Park Deok-bae, an economist from the Hyundai Research Institute.
“There is a possibility that low-income earners could eventually be pushed to the doorsteps of private lenders or loan sharks. Authorities should find a way to balance the effort between defusing household debt and supporting desperate borrowers to repay rather than just squeezing bank loans.”
Korean household debt has been growing by an average of 13 percent annually since the financial crisis in the late 1990s, almost twice as fast as the gross domestic product(GDP) as families reel from a lengthy binge on property, stocks and credit cards.
Just six years after breaching the 500-trillon-won mark for the first time, the mountain of debt amassed by consumers on mortgages, personal loans and credit cards reached 892.5 trillion won as of September last year.
When combining borrowing by the self-employed and non-profit organizations as well as non-interest paying debt, the consumer debt measurement has long exceeded one quadrillion won, the size of Korea’s GDP for 2010.
The Lee Myung-bak government has been accused frequently of being too complacent about combating the historically high levels of household debt despite the serious threat posed to the country’s financial stability.
While policymakers such as BOK Governor Kim Choong-soo maintain that the country’s household debt is broadly manageable, it’s hard to deny that the problems created by personal indebtedness have made consumers and the wider economy more sensitive to shocks.
Critics have accused the BOK of adding fuel to the fire by keeping borrowing costs low, which encouraged households to maintain their borrow-to-spend habits. However, with the eurozone debt problems threatening to derail the country’s recovery, it’s likely that central banks will cut interest rates before lifting them.
“Alarm about household debt has been there for a while,” said Hong Jeong-hye, an economist from Shinyoung Investment and Securities.
“While the level of delinquency on loans is still within the manageable range, it’s clearly on the way up. The increase in credit card loans is another alarming indicator as it points to the perils of lower-end borrowers, many of them relying on multiple card loans at once to support their cost of living. If the growth in household debt continues to significantly outplace the economy, then the country could be facing the bursting of another asset bubble.”