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Default concerns grow amid low interest
A loan seeker sits in front of a teller at a branch of Hana Bank in Seoul, April 20. The Korea Times file
By Lee Kyung-min
By Lee Kyung-min
Economists expressed concerns Sunday over household and corporate debt extended by government-backed lending programs introduced as part of a relief package amid the COVID-19 pandemic.
The government-led liquidity injection is more than warranted to fight against a virus-sparked economic shock, but a prolonged fiscal spending and assisted lending lacking “foresight” will lead to a massive chain of defaults from businesses and households, they say.
The emergency spending is only as good as the projected growth in the months that policymakers hope would come following the current severe contraction, but a continued delay in the much-needed recovery could entail a deeper-than-feared systemic risk in the economy, they noted.
Data from the Financial Supervisory Service (FSS) showed a combined delinquency rate at the country's commercial banks stood at 0.39 percent as of March, up 0.03 percentage points from three months earlier.
While the increase is not as great as the 0.6 percentage points recorded in the first quarter of 2019 ― from three months earlier ― figures for the second quarter forward will be much worse given the new coronavirus began to spread rapidly in late February.
“Mounting household debt has long been cited as one of the greatest vulnerabilities of the Korean economy,” Seoul National University professor Kim So-young said.
Many businesses are hanging by a thread with the government lending program being the only buffer delaying them from going into an outright default. If the economy fails to pick up in time, continued delinquent loan payments for months will lead to defaults, and the risk being transferred to banks that lent the money will amplify shocks in the economy.
“Delinquency rates tend to trail behind the economic condition by months. Given lockdowns and social distancing were put in place in March, economic activities halted will translate into appalling figures in the second and third quarters,” he added.
The projection is in line with household and corporate borrowing that tripled between February and April from a year earlier.
Data from the Bank of Korea showed the increase was 75.4 trillion won ($60.9 billion), about 3.4 times that of the 21.9 trillion won a year earlier.
Of more concern is an expected increase in demand for borrowing following a 25-basis-point key rate cut by the central bank in late May.
The record-low key rate of 0.5 percent helps people borrow at a lower cost. The expansionary monetary policy aims to boost economic activities by encouraging borrowing and spending in the flagging economy.