By Kang Seung-woo
Staff reporter
A top financial regulator said that the risk of growing household debt and project financing (PF) loans are potential threats to complete economic recovery.
“Although there is a little possibility that household debt will become insolvent in the near term, rate hikes and destabilizing housing prices may adversely affect households’ financial abilities to make loan payments,” Financial Supervisory Service (FSS) Governor Kim Jong-chang said in a speech during a conference on Jeju Island Monday.
“We plan to strengthen our risk management and increase the portion of long-term, fixed-rate household loans.”
Since the Bank of Korea (BOK) raised its key interest rate on July 9 for the first time in 17 months amid escalating concerns over inflationary pressure, banks have been in a rush to elevate interest rates on loans and igniting fears that many overleveraged borrowers will go belly up due to swelling interest burdens.
“We will expand the support for people vulnerable to rate increases and discuss ways to slow down the hike pace by activating the corporate bond market and flexibly limiting banks’ forward exchange positions,” he said.
Kim said, “Savings banks’ PF loans are in danger of insolvency due to the sluggish property market, so we will try our best to boost their financial health and beef up their capital base.”
PF is the financing of long-term infrastructure and industrial projects. Debt and equity used to finance the project are paid back from the cash-flow generated after the plan has been implemented.
“As mortgages and PF loans are due to porous risk management, we need to focus on them from a long-term point of view,” he said.
The savings banks’ PF loans have been blamed for being the primary risk factor and the banks will be required in the MOU to write off soured PF lending and raise more capital to provide buffers against possible loan losses by the end of the month, according to the FSS.
Regarding the global recovery, Kim said that the world economy will travel a rough road to get back on track.
“The effects from the worst global financial crisis since the Great Depression will likely prevent the world economy from recovering to the pre-crisis level for the time being,” he said.
“Financial risks, fueled by the Southern European debt problem, is likely to slow down the recovery of the financial industry,” he said.