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| A signboard directs customers to the personal loan service section at a commercial bank in Seoul, in this photo taken in June 2021. Korea Times file |
By Yi Whan-woo
Household debt in Korea is posing a great threat to the economy, as it is growing at a faster pace amid more aggressive credit tightening embraced by the Bank of Korea (BOK) over the past months to tame red-hot inflation.
Total household debt in Korea surged to a record 1,869.4 trillion won ($1.33 trillion) in the second quarter of 2022, up 258 trillion won from the first three months of 2020 when the nation was in the early stages of the COVID-19 pandemic.
With this overall increase of 258 trillion won, the average financial imbalance of households nationwide was measured at 78.5 points in data released by Hyundai Research Institute in August.
The measurement was comparable to 75.4 points during the 2008-2009 global financial crisis.
The higher the number, the worse the financial imbalance, according to the institute.
"The rise in the financial imbalance during the pandemic suggests that household debt is increasingly standing in the way of an economic recovery," the institute noted.
The worsening financial imbalance is in line with an increase in the ratio of household debt to disposable income.
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Data from the Organisation for Economic Co-operation and Development (OECD) showed Korea's outstanding household debt was equal to 200.7 percent of the net household disposable income in 2020, up from 175 percent in 2016.
Disposable income refers to the amount of money left to spend and save after income taxes have been deducted.
The 2020 figure is well above a number of major OECD member countries, including the U.K. (175.4 percent), France (127.2 percent) and the U.S. (101.1 percent).
Under the circumstances, household debt is likely to continue on an upward trajectory, after the BOK took a second big rate hike, raising the benchmark interest rate by half a percentage point, Wednesday, and sending the rate back to 3 percent for the first time since October 2012.
The big hike follows the previous outsized rate increase in July, and marks the fifth consecutive monetary tightening move since April.
A quarter-percentage-point rate increase translates into a rise of 3.3 trillion won in interest payments for household debt, according to the BOK.
Correspondingly, the second big hike is estimated to increase interest payments by 6.9 trillion won.
It also said that up to 67 percent of aggregate household debt is related to housing loans, which many young borrowers took out from banks when the interest rate was much lower and have struggled to pay back to date.
The 3 percent policy rate will put more of a burden on young borrowers, as it is anticipated to push the mortgage loan rate to a maximum of 8 percent by the end of 2022.
To make things worse, the BOK remains open to another big hike as inflation is not slowing down and currently hovers in the 5 percent range.
To tackle snowballing household debt, Shyn Yong-sang, director of the Korea Institute of Finance (KIF), suggested enhancing programs aimed at aiding low-income households.
"The failure to save the socially-vulnerable group of borrowers may lead to a domino effect of credit defaults," he warned.
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