By Yoon Ja-young
The quality of household debt is deteriorating rapidly as low-income households turn to non-bank lenders despite the higher interest rates following tougher loan regulations. Analysts advise that the government should bolster risk management of loans by low-income households as the economic downturn following corporate restructuring can worsen the problem.
According to the Bank of Korea, the balance of household loans at non-bank financial institutions totaled 262.8 trillion won as of May, up 14.1 percent from a year ago. That is near double the increase of household loans at banks, which jumped 7.9 percent.
The household debt increase at banks has been slowing down following tougher regulations. The financial regulator adopted a tougher mortgage loan screening system at banks in February, which focuses on the ability of borrowers to repay debts. While household loans by banks, which once increased by over 10 percent, are slowing down the pace of the increase, the measure prompted loan seekers to resort to non-banks despite higher interest rates. The household loans there have been recording double digit growth each month from January this year.
The central bank is also aware of the problem. “Household debt is continuing a steep rate of increase at non-banks while collective loans at banks are also increasing,” Bank of Korea Governor Lee Ju-yeol said at the media briefing last week. “This is a problem that shouldn’t be overlooked,” he added.
The quality of the debt is also deteriorating. According to the data compiled by the central bank, one third of the loans at non-banks went to low income households with less than 30 million won annual income. The ratio of multiple loan holders, who have three or more loans at non-banks, also stands at 26.9 percent.
It leaves the central bank with few options. While a key rate hike can restrict the growth of loans, it means more of a burden on those of low-income. Corporate restructuring is also likely to lead to a soaring delinquency ratio anytime.
Park Choon-sung, a research fellow at the Korea Institute of Finance, said that the government should focus on risk management of the debt of low income households.
“Among those with low-incomes, the number of multiple loan holders is rising and so is their debt-service ratio (DSR). They need monitoring,” he said. DSR measures how much of their disposable income must be devoted to service their loan obligations. Rising DSR means the debt one has to pay back is rising faster than the rise of their disposable income.
The central bank also noted in a report that bad loans may increase among households holding excessive loans or of those with low incomes. “There should be greater effort to increase household income and improve the loan structure,” the report noted.