Household debt posing major threat to Korean economy amid pandemic

Financial Services Commission (FSC) Chairman nominee Koh Seung-beom, center, is surrounded by a group of reporters on Aug. 6, as he enters a building in central Seoul to prepare for his new role at the FSC. Yonhap

Banks rushing to scale down household lending

By Anna J. Park

The unrelenting surge in household debt has become the biggest downside risk to the Korean economy, as a growing number of loans taken out by individuals and small business owners are running a high risk of going insolvent amid the prolonged COVID-19 pandemic.

The excessive amount of liquidity pumped into the global market due to COVID-19 has made the country's real estate prices skyrocket, and for panicked people to rely more on already-worsened household debt to purchase real estate, creating a vicious cycle in the economy.

According to the Financial Services Commission (FSC), the outstanding balance of household debt stood at an all-time high of 1,710.3 trillion won ($1.4 trillion) at the end of this past July, up 13.6 percent or about 205 trillion won from the end of 2019.

The financial authorities had earlier set an annual target of a 5 to 6 percent increase in household debt for this year. However, July's monthly figure showed that the growth rate already surpassed 10 percent compared to the same month last year.

Along with growing household debt, the country's housing prices rose by 14.26 percent in July, compared to a year ago. This rise is the highest annual increase since 2002.

FSC chief nominee Koh Seung-beom warned that excessive increases in credit could lead to the creation and implosion of a bubble, impairing the growth of the real economy.

"Managing household debt is the most important task assumed by the FSC chief," Koh said earlier this month.

Aiming to rein in overheating in the market, the financial authorities are set to pressure commercial banks to tighten the giving out of household loans. The FSC has asked some banks to submit their specific plans to manage their entire portfolio of loans. Giving in to the pressure, NH NongHyup Bank announced that it would not give out any new mortgage loans until November.

Starting from Friday, Woori Bank also decided to stop offering new "jeonse loans" until the end of September, in a move to comply strictly with the watchdog's growing pressure. The lender said that it would resume providing the loans in the fourth quarter.

Standard Chartered (SC) Bank Korea also jumped on the bandwagon by saying that it will discontinue the sale of its mortgage loan product called, First Home Loan, from Aug. 18.

The authorities are also expected to supervise the secondary financial market's loan products strictly, as household debt from non-bank financial firms has risen to 27.4 trillion won as of this July, compared to only 2.4 trillion won a year ago.

While experts recommend a more stringent approach to managing growing household debt, the uncertainty of the market, due to the rising number of Delta variant infections, as well as concerns from the tapering of earlier measures suggests a more cautious approach in dealing with the issue.

With the strictest social distancing measures extended amid the fourth wave of COVID-19 infections here, the number of personal bankruptcy filings reached a record high this year, standing at 21,024 as of this May, the highest figure since 2017.

It shows the difficulties that individuals face in their business operations amid the pandemic situation. While small business owners' hardships keep growing, the government cannot focus simply on reducing the entire amount of debt.

That's why experts share a common view that the government needs a sophisticated policy mix to tackle the issue of growing household debt.

"The effect of household debt creates a differentiated economic effect, according to the direction of the money. If it goes to the area of consumption or corporate investment, the debt creates positive economic growth, yet most of the current household debt goes toward the real estate market, which only increases asset values, not productivity in the economy," Shyn Yong-sang, senior research fellow at the Korea Institute of Finance, told The Korea Times.

"If the entire amount of household debt exceeds 80 percent of a country's GDP, it is estimated that it will create a negative impact on the economy. The current level of household debt in Korea now stands at 104 percent of the country's GDP, and this excessive amount of debt can burden the long-term growth of the economy," Shyn stressed, saying that a well-structured policy mix of monetary and fiscal measures is needed to lessen the burden.

Kyobo Securities analyst Lim Dong-min also agrees that a more analytical and cautious approach in policymaking is needed.

"In principle, those who engage in business operations cannot help but utilize capital debt to produce outcomes. As loans are an unavoidable means in the economy, the government needs meticulously to separate groups of people impacted by debt-controlling policies and pursue distinct measures for each group," Lim said.