By Kim Tong-hyung
Families appear to have become locked in a spiraling debt crisis that will last for coming years as they plunge further into the red on high inflation, stagnant wages and unemployment.
Like a mad relative in the back room, the problem isn’t going away, but policymakers are willing to pretend it doesn’t exist as they hang the fate of Korea’s faltering recovery on households extending their destructive borrow-to-spend habits.
Just seven years after it broke through the 500 trillion won level for the first time, the mountain of debt amassed by Korean consumers reached 912.9 trillion (about $812 billion) at the end of last year, the Bank of Korea (BOK) said.
The central bank’s quarterly measurements track borrowing from financial service providers such as banks, credit-card companies, insurance firms and also store credit. When combining non-interest paying debt and borrowing by the self-employed, the consumer debt total has long passed one quadrillion won, meaning that Koreans owe more money than the entire economy generates in a year.
Outstanding debt in loans and store credit increased 22.3 trillion won in the three months to December, a 7.8 percent rise from the third quarter, as squeezed budgets forced households to fund the festive season on credit, BOK figures suggest.
``Household debt increased faster in provincial areas than Seoul and the metropolitan area during the fourth quarter, driven by an increasing number of home-backed loans in Busan, South Gyeongsang Province and Sejong City,’’ said a BOK official.
``Among non-bank institutions, increased borrowing from mutual credit providers was notable and appears to have been influenced by the rise in deposits.’’
Desperate to defuse the threat posed by historically high levels of personal indebtedness, financial regulators here have been pressing banks to strengthen their guidelines on issuing loans. However, the strengthened restrictions are now backfiring by forcing households to take on riskier credit, such as borrowing from non-bank financial institution, and taking unsecured or multiple loans.
Borrowings from commercial banks increased 6.2 trillion won in the fourth quarter to reach 455.9 trillion won, including 306.1 trillion won in mortgages, the BOK said. Borrowings from secondary savings institutions, including savings banks, mutual saving banks and credit unions, increased at a faster pace, adding 7.9 trillion won during the period to measure at 186.8 trillion won.
Loans from non-savings institutions such as insurances companies, securities firms, house finance agencies and private money lenders were measured at 215.4 trillion won as of December.
The borrowing binge in past years had been driven by speculative demand for property, which has left millions trapped in negative equity after the housing market collapsed with the fall of Lehman Brothers.
While the demand for house purchases has flattened, the consumer debt tally continues to grow as more people are forced to borrow money simply to fund day-to-day living with their purchasing power eroding on stagnant income and inflation.
Despite the household debt to disposable income ratio speeding toward 160 percent, policymakers like BOK Governor Kim Choong-soo continue to claim that the currently level of indebtedness is manageable.
Such optimism was backed by a recent study by Goldman Sachs, which predicted that a soft landing would be possible as the proportion of interest payment to household income remains stable at around 2 percent. However, critics say that Goldman Sachs oversimplified things and failed to weigh in the stagnation of household income and damages in savings and spending power.
Regulators can’t be too stern in clamping down on household lending either as government officials are desperate to jolt consumption as worsening global conditions take the air out of exports.