By Kang Seung-woo
Another wake-up call illustrating the nation’s worsening household debt is ringing as a record number of personal insolvencies puts the Korean economy under strain.
Observers forecast that the figure can worsen when the government goes all out against growing household indebtedness later this month, which is likely to brutally squeeze debtors.
According to the Credit Counseling and Recovery Service (CCRS), a non-profit corporation tasked to support debtors in financial difficulty, the number of applicants for its individual debt-restructuring program surpassed 1 million as of June 15.
The debt adjustment programs are structured to help people refinance outstanding debt that they cannot pay back on time, and to offer emergency living support funds.
The individual bankruptcy rescue package was launched in October 2002 and the number of applicants reached around some 350,000 in 2004 due to a credit card crisis which led to more than 3 million people becoming defaulters. Since then, the figure has been steadily on the increase.
However, during the same period, those who completed from debt refinancing just came to about 160,000, straining the government already plagued by the currently aggravating household debt.
According to the central bank, the country’s household indebtedness hit a record 801 trillion won in the first quarter of this year, with debt per household standing at 46.11 million won, up 7.7 million won from three years ago.
The market is concerned that if the government continues to neglect personal bankruptcies, the problem is expected to become exponentially more serious as unfavorable factors loom.
Accumulating debt has been outpacing the growth of the gross national disposable income in the past 10 years, as the debt averaged an annual 10 percent increase, compared with an income rise of 5 percent rise per year.
Loans extended by the secondary financial sector with low-income households and underprivileged people as the primary customers have been a rising trend as well.
As of the end of last year, loans extended from the industry, including savings banks and the National Credit Union Federation of Korea, grew 16.7 percent from a year ago.
In particular, lending from savings banks jumped 44 percent during the cited period.
In addition, the BOK’s move to continue pushing up its key interest rate is crimping households’ capacity to service debt.
The central bank hiked its policy rates to 3.25 percent earlier this month, the third rate increase this year, in efforts to rein in soaring consumer prices.
The growing concern is that the government’s measures to curb soaring household debt will not work because those with poor credit and minimal income will have trouble borrowing money from financial institutions.
As a matter of fact, Financial Services Commission (FSC) Chairman Kim Seok-dong said that if financial institutions start reducing household debt, there will be those who will have to resort to loan sharks who charge excessively high interest rates.
“If the government takes action to tame ballooning household debt, poor creditors and small-income earners are the ones who will fall victim,” said Lee Chang-seon, managing director of the financial research department at LG Economic Research Institute.
“The government has to monitor the overall household debt, but it also needs to step up efforts such as providing support through microcredit in order to help credit defaulters.”