Bank of Korea warns of household credit risk

Min Jwa-hong, center, director at the Bank of Korea's financial stability department, speaks during a briefing at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea

By Lee Min-hyung

The Bank of Korea (BOK) warned of a household credit risk amid a sharp increase in their debt levels after the coronavirus outbreak last year, the central bank said Thursday.

“We are doubtful whether the actual credit risks of households and companies have been exposed,” Min Jwa-hong, director at the central bank's financial stability department, told reporters during an online briefing. “The risks may have been eclipsed by (pandemic-induced) financial support,” he added.

According to BOK data, the nation's household debt reached 1,726.1 trillion won ($1.52 trillion) as of the end of 2020, up 7.9 percent from the previous year.

What is particularly worrisome is the rapid growth of the figure. The quarterly growth rate of household debt stood at 4.6 percent as of the first quarter of 2020 from a quarter earlier. The level has since gradually increased to 7.9 percent during the fourth quarter, compared to the previous three-month period, central bank data showed.

“As financial support cannot continue forever, we need to take into serious account a possible gap between economic indices and actual credit risks,” he said.

Corporate debt was also on a steep rise. Corporate lending in Korea reached 1,359.4 trillion won as of the end of 2020, up 15.3 percent from the previous year. The rise was attributable to the pandemic-induced economic doldrums, which affected sales of a number of mid- to small-sized enterprises throughout last year.

A series of other indices also sent alarm bells ringing for households and companies with huge debts. The household and corporate lending-to-GDP ratio surged by 18.4 percentage points to 215.5 percent as of the end of 2020, compared to a year ago.

“Financial imbalance has become more serious, as households borrowed money to invest in the asset market, which resulted in an asset price bubble,” the BOK official said.

Following the coronavirus outbreak in March last year, households went on a buying spree of apartments and stocks by taking out loans. The nationwide investment frenzy was sparked by pandemic-induced, super-low interest rates.

But chances are that vulnerable social groups may fall victim to lingering credit risks after the government stops providing financial support for them, according to the BOK official.