Alarms being sounded over increasing non-banking loans

By Kim Tong-hyung

Were Korean policymakers inept enough to totally revamp a dire household debt situation and actually make things worse?

Granted, doing nothing isn’t an option when the historically high level of debt poses considerable challenges to the country’s financial stability. But it’s hard to ignore the numbers, which continue to say government authorities have made an egregious mistake in managing public indebtedness.

Attempting to claw away at the massive consumer debt mountain, the Financial Services Commission (FSC) has been tightening lending at commercial banks. However, the move appears to be backfiring by streaming more people toward non-banking sources of credit and their crippling interest rates.

Loans from the non-banking sector accounted for 51.7 percent of household borrowing during the April-June period, following the preceding quarter’s 50 percent, the Bank of Korea (BOK) said, representing the highest level since the first quarter of 2008 when the bank began compiling the data.

At the end of June, loans provided by non-banking institutions reached 335.6 trillion won (about $300 billion), with 173.6 trillion won borrowed by households and 162 trillion won by companies.

``Loans by non-banking institutions put households under heavier pressure for debt repayment as their interest rates are higher than those of banks. It’s alarming that an increasing number of low-income earners with poor credit are relying on these loans, deteriorating the overall health in family finance,’’ said a BOK official.

``Growth in non-banking loans in the agricultural, fisheries and construction sectors has been subdued since last year, but household borrowing has been rising consistently. Lending restrictions on commercial banks have been a factor, as well as regulatory efforts to clean up the secondary banking sector.’’

A triple-whammy of household debt, stagnant wages and soaring inflation has been eroding family finances here, a concern for the country’s fragile recovery that has yet to get a push from consumption.

The economy expanded at a meager 3.4 percent annual rate in the third quarter, according to the BOK’s latest gross domestic product (GDP) measurement, representing the slowest pace in nearly two years.

Just six years after breaching the 500-trillion-won level for the first time, the mountain of debt amassed by Korean households has reached 876.4 trillion won at the end of June, after adding 19 trillion won in the second quarter alone.

The BOK’s figures represent individuals’ loans from financial institutions such as banks, credit card companies and state housing finance agencies. When combining unsecured loans, non-interest paying debt and money borrowed by the self-employed and non-profit organizations, the scale of debt is believed to have surpassed one quadrillion won.

Despite the alarming figures, policymakers have maintained that the current level of indebtedness is broadly manageable. But when a nation’s ratio of debt to disposable income is speeding toward 160 percent, there probably shouldn’t be any debate on whether the country is facing a serious problem.

The borrowing binge by Korean households was driven by speculative demand for property in past years. But the housing sector has been in freefall since the recent recession, leaving scores of homeowners trapped with negative equity.

Financial regulators have been clamping down on lending by commercial banks, forcing them to impose stricter guidelines before approving mortgages and credit loans for individuals. A number of major lenders like Shinhan, Hana and Nonghyup even halted some new household loans for several weeks in August to massage bureaucratic egos.

Regulators have also suspended 16 savings banks this year alone, including major players like Busan Mutual and Tomato, in an attempt to purge the secondary banking sector that has been badly exposed to the country’s toxic construction and real estate sector.

Some observers believe that the BOK’s trigger-shyness in raising interest rates has aggravated the debt problem by extending the expectations for low borrowing costs. Despite the record-high consumer debt and soaring inflation, the bank’s rate-setters are reluctant to clamp down hard on money supply, judging the recovery as too fragile to withstand a significant increase in borrowing costs.

Now the BOK is utterly out of monetary options with the eurozone debt problems threatening to again send the world into spiraling turmoil. The bank’s interest rate setters maintained the policy rate at 3.25 percent for the fourth consecutive month in October, citing murky global outlooks.