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| People pass by a banner introducing a bank's loan products in downtown Seoul, Thursday Yonhap |
By Lee Yeon-woo
The household debt burden in Korea is aggravating, with repayment based on one's annual income increasing at the second fastest pace in the world.
According to data from the Bank for Intentional Settlements (BIS), Monday, Korea's debt service ratio (DSR) was 13.6 percent last year. This ranked second among the 17 major economies, trailing only Australia at 14.7 percent.
Furthermore, its rate of debt increase, which saw the DSR rise by 0.8 percent compared to 2021, was also the second fastest, again surpassed only by Australia.
The DSR is a measurement of the amount of principal and the interest to be paid by individuals annually in proportion to their yearly salary.
Market watchers have expressed that the BOK's aggressive monetary tightening has exacerbated the interest burden for households. In 2022 alone, the BOK hiked the policy rate seven times, raising the rate from 1.25 percent to 3.25 percent.
Correspondingly, separate data from the Bank of Korea (BOK) on Monday also showed that Korea's ratio of household debt to gross domestic product (GDP) is the third highest in the world.
The BOK data showed household debt-to-GDP ratio stood at 105 percent as of 2022, the third highest among the 43 main countries, following Switzerland at 128.3 percent and Australia at 111.8 percent.
A new problem emerging this year is that an increasing number of households are rushing to secure loans as the central bank has frozen the policy rate for the fourth consecutive time this year. As of June, the balance of household loans from deposit banks reached a record-high of 1,062 trillion won.
"The danger of the current high level of household debt leading to financial instability is limited. However, it is hindering Korea's long-term economic growth and widening asset inequality," the BOK analyzed in a separate report related to the issue, released on Monday.
"Considering the examples of advanced economies and the high percentage of real assets held by households in our country, we anticipate that significantly reducing household debt to fall within the GDP range will require a substantial amount of time," it added.
The bank pointed out financial institutions' preference for household loans and imperfect loan regulation as long-term factors contributing to the accumulation of household debts.
"Financial institutions tend to prefer issuing household loans over corporate loans, as the former are more profitable and place a lower burden on capital regulation," the report stated. "Korea adopted DSR regulation later than other major economies … The lending practices of financial companies for credit loans are also relatively lenient."
These factors were fueled by the public's increasing demand for tangible assets, driven by the trends toward monetary easing, leading to soaring household debts.
The BOK emphasized the necessity to gradually deleverage household debts, using macroprudential and monetary policies.
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