Alarm grows on household debt

By Kang Seung-woo

The country’s six largest banks dramatically increased their household lending during the first three months of the year despite the growing concerns over deteriorating family finances, the financial watchdog said Friday.

The Financial Supervisory Service (FSS) is concerned that the intensifying competition among banks could come at the cost of pulling down credit quality when the country’s historically high household debt poses a significant risk to financial stability.

The combined household loans approved by the top six banks ― KB Kookmin, Woori, Shinhan, Hana, Industrial Bank of Korea and the National Agricultural Cooperation Federation (NH Bank) ― increased by 2.5 trillion won ($2.31 billion) in the first quarter, according to FSS figures. This accounted for 40 percent of the 6.3 trillion won in loans extended by banks and other financial institutions.

The increase in mortgage loans reached 3.7 trillion won during the period, which offset the decline in other types of borrowing like credit purchases and overdraft loans.

At the end of March, household loans at financial institutions totaled 752.3 trillion won, with mortgages reaching 435.1 trillion won.

Local banks, which were recently hit hard by the global financial crisis, have begun to increase their assets as the local economy continues to grow. Due to cautions against sour construction loans, domestic banks are focusing more on extending loans to households.

Alarmed by the escalating household loans, the FSS summoned senior officials of the six banks to urge them to refrain from engaging in excessive competition to increase lending.

“Banks’ efforts to boost assets encourage overheated competition. The FSS plans to carry out thorough inspections of banks’ lending to households in the second half of the year and will take punitive action against any irregularities,” said an official of the FSS.

Korea’s soaring household debt eclipsed the 800 trillion won mark for the first time in the January-to-March period, according to the Bank of Korea (BOK) earlier this week.

The outstanding household credit reached 801.4 trillion won, up 6 trillion won from three months earlier.

The historically-high level of household debt may pose considerable challenges to the country’s financial stability. Its household lending as measured by a ratio of debt to disposable income was 157 percent in 2010, ranked among the world’s highest along with nations like Britain and Australia.

Due to the growing debt, the per capita annual interest payment burden came to 480,525 won as of the end of March, up from 465,343 won from the previous month, the central bank said. The March reading marked the largest amount since 486,838 won a year ago.

The BOK is scheduled to hold a monthly monetary policy meeting on Friday to set its key interest rate for June.

However, the fast-rising household debt is causing a headache for policymakers because rising interest rates will crease households’ capacity to service debt, a BOK official said, adding that delaying a rate hike, however, could also result in further growth of their weighty loans.