By Kang Seung-woo
Household and corporate debts are continuing on an upward trend, spawning fears that they will combine to create a toxic cocktail for the Korean economy with the prolonged slump in the real estate market.
The central bank said Tuesday that households and corporate lending reached 1,409 trillion won ($1.2 trillion) in June, as a low interest rate led them to take out loans from financial companies.
The outstanding balance of household debt was 652.5 trillion won as of the end of June, while that of companies stood at 756.7 trillion won, according to the Bank of Korea (BOK).
The amount of lending surpassed the 1,400 trillion won mark for the first time in May, at 1,408.3 trillion won and it has continued to rise on the strength of low borrowing costs.
Household lending, despite a growing inability to repay the debt, has also been rising.
January’s debt at households and firms stood at 1,371.1 trillion won, rising to 1,380.7 trillion won in February, 1,383.5 trillion won in March and 1,391.5 trillion won in April.
“Above all, the low interest rate affected borrowing,” said Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute.
The BOK adopted stimulus measures to cushion Asia’s fourth-largest economy against the fallout of the global financial turmoil.
It kept its key interest rate at a record low of 2 percent for 16 straight months before raising it to 2.25 percent last month amid concerns that the fast recovery of the local economy could produce inflationary pressure.
He also said that the building of new apartments contributed to the growth of household loans.
“Most household loans are comprised of mortgages, and they mortgage their apartments for loans.”
In addition, loan products by non-banking institutions are also expected to prompt household lending.
The Financial Services Commission (FSC)’s newly-born Sunshine Loan, offered by the National Agricultural Cooperative Federation (Nonghyup) and other non-banking financial firms, lent 110.7 billion won to more than 13,000 people 11 days after its inception on July 26.
The program is aimed at giving financial support to those who have low incomes and low credit ratings.
The central bank is expected to raise its rate again soon.
“Compared with income level, the proportion of local household lending is high. Although it is not likely to affect the economy immediately despite a possible rate hike, the high rate of interest could be a threat over the long-term,” Lee said.