Bank of Korea to expand purchase of bonds for companies with low credit

Min Jwa-hong, center, director general at the Bank of Korea's financial stability department, speaks during an online press conference at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

The Bank of Korea (BOK) decided Thursday to extend its financing to a special purpose vehicle (SPV) for another six months to July 2021, a move to relieve companies with low credit from a liquidity squeeze induced by the prolonged coronavirus pandemic.

The central bank set up the SPV in July 2020 with the Korean Development Bank (KDB) and the Ministry of Economy and Finance. The central bank provided loans worth 1.78 trillion won for the SPV to purchase commercial papers and corporate bonds and help companies tackle the virus shock.

Under the latest decision by the BOK's monetary policy board, the SPV will increase the portion of its purchase for low-credit bonds rated as A to BBB from the previous 70 percent to 75 percent. It also cut down the purchase of AA-rated bonds to 25 percent from the earlier 30 percent.

The authorities said in a joint statement that the move is aimed at helping expand liquidity for small and medium-sized enterprises with low credit ratings that suffer financial setbacks from the longer-than-expected virus shock.

Data also showed corporate loans have been on the steep rise in 2020. According to the BOK, companies here have borrowed 1,332.2 trillion won from banks as of the end of September, up 15.5 percent from a year ago, hit hard by the economic difficulties induced by the virus spread.

“As uncertainties over companies' management conditions remain in place, they have to brace for the possible credit crisis under the scenario that their liquidity worsens due to sluggish earnings recovery,” an official from the central bank said.

The BOK also expressed concerns over the snowballing household debts here. The total amount of household debts reached 1,682.1 trillion won as of the end of the third quarter, up 7 percent from the previous year.

But much more worrisome is the household debt-to-nominal GDP ratio came in at 101.1 percent as of the end of September, up 7.4 percentage points from a year earlier.

This was the first time that the ratio topped 100 percent.

“Households may endure more burden on debts if their income declines amid prolonged economic downfall,” Min Jwa-hong, director general at the BOK's financial stability department, said during an online press conference, Thursday. Households need to tightly carry out risk management over their debts in advance amid virus-related uncertainties, according to him.

The surge in household debt is attributable to the nationwide investment boom particularly in young age groups. Those in their 30s have engaged in a mass buying spree of apartments in Seoul and its surrounding areas this year by taking loans.

The stock investment has also gained popularity from people from all walks of life here. With the central bank slashing a key interest rate down to a record low of 0.5 percent, a growing number of households here have taken non-collateral (credit) loans to invest their capital in stock markets here and abroad.

The central bank, however, raised concerns that households, particularly those in the low-income bracket, may fall into a state of insolvency unless they take control of their debt levels by refraining from making debt-driven investments.