By Kim Tae-gyu
Snowballing household debt shows no signs of stabilizing this year despite a series of government measures, posing another major threat to an already-fragile economy.
According to the Bank of Korea, Sunday, Korean homes were indebted to banks and non-banking lenders 956.2 trillion won ($842.8 billion) as of the end of this May, up 36.3 trillion won from last year.
In particular, they owed non-banking lenders 262.8 trillion won, which marks a 14.2 trillion won rise over the first five months. The uptick more than doubled compared to the corresponding period last year.
Including securities firms, insurers and credit card issuers to the data pool, the amount is expected to be much higher.
“The pace of increase in banks’ loans is relatively fine but that of non-banking lenders is unexpectedly fast,” said a Seoul analyst.
“The government tried to assuage concerns over ballooning debt by beefing up regulations on commercial banks’ loans. That seems to have prompted people to knock on the doors of non-banking lenders in spite of higher interests.”
The country’s benchmark interest rate stands at a record-low 1.25 percent and experts predict that the rate may be trimmed at least 25 basis points this year.
The low borrowing costs have increased the household debt, which may deal a blow to Korea Inc., which already suffers from a low growth rate attributable to sluggish consumption and trade.
Some observers point their fingers at the current administration.
“President Park Geun-hye used to say she will reduce the debt-to-disposable income ratio. To achieve the goal, incomes should outgrow obligations,” said Prof. Kim Sang-jo at Hansung University.
“However, the reverse has happened as people’s wages hardly rose while debt jumped. This heavily weighs on consumption and the overall economy. Who would open up their wallets if they owe a lot of money?”
In particular, Kim took issue with the fact that the government eased the regulations in 2014 on qualifications for mortgage borrowers called the debt-to-income (DTI) and loan-to-value (LTV) ratios.
The woes on debt made the government take such steps this year as restricting high-risk lending including interest-only loans to those with low incomes relative to the real estate value.
But they refused to strengthen the DTI and LTV ratios.
The former measures what proportion of homeowner’s monthly income is used to pay off debts while the latter gauges a percentage of the outstanding debt on real estate to its market value.
A domestic private think-tank also raised a warning flag of late.
The Hyundai Research Institute announced that a total of 1.58 million households spent more than 40 percent of their income to pay off debt or interest last year.
Such debt-ridden homes accounted for 14.8 percent of the whole, up by 2.5 percentage points, or 260,000, compared to 2012. The proportion may be higher at the end of this year.