Regulator insists household debt at manageable level

By Kang Seung-woo

Top economic officials are taking turns in silencing questions over the government’s measures to tackle household debt.

Financial Services Commission Chairman Kim Seok-dong said Friday that Seoul’s action against mounting consumer debt will lead to a soft landing.

Kim’s comment came after Strategy and Finance Minister Bahk Jae-wan spoke on the increasing household debt.

“I firmly believe that household debt will make a soft landing,” Kim said in a conference organized by the Korea Chamber of Commerce and Industry (KCCI).

“I am determined to carry out the plan (despite a backlash from the banking sector).”

Earlier this week, Bahk also said, “Since 2000, household debt has shown a steady growth, but it is manageable, compared with other advanced economies.

“On average, the debt problem is at a manageable level and can land softly. The government will make efforts to prevent it from becoming a systemic risk.”

The government stepped in to help curb soaring household debt late last month, unveiling plans to assist people in repaying their loans and suppress irresponsible lending by banks.

The 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 credit 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 FSC, the nation’s regulator, aims to boost the figure to 30 percent by 2016.

The move comes on increasing concerns that the historically-high levels of household debt, combined with soaring inflation and rising interest rates, are pushing tens of thousands of Korean households to the brink of bankruptcy and threatening the country’s financial stability.

Less than three years after surpassing 500 trillion won, the debt amassed by Korean households reached a new high of 801.4 trillion won (about $758.12 billion) after adding 6 trillion won in the first quarter of this year alone, according to the Bank of Korea (BOK).

However, there is growing skepticism of the government’s plan.

Critics say with inflationary pressure still high and the property market slumping, banks’ sudden lending-tightening measures and interest rate hikes will certainly place more burdens on cash-strapped citizens, which could derail the government’s anti-household debt measures.