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A man surnamed Kim, who is in his 30s, managed to borrow 2 million won ($1,504) from a credit card company, just days before his loan from a different card company was about to mature.
Even with an astonomical borrowing rate of around 15 percent, the man knew his credit score would take a huge hit if he took out the loan. But with no other option, he agreed to the rate, because defaulting on his credit card and other debt payment obligations can lead to catastrophic financial consequences.
“I make what I make when I can, unlike most salaried workers,” he said. “I had some money in the bank, but it was not enough to cover food and other living expenses including utility bills. I’ve been making less and less over the past few months and prices of everything are going up. I have to take out loans to pay off the other debt to buy time until I make some money,” Kim said.
He is among many low-income borrowers seeking to find a new line of credit to pay existing debts. This is illustrated by seven local credit card companies' combined outstanding loan balance surpassing 1.3 trillion in September, up 43 percent from the year before.
But more problematic is that Kim is among the fortunate ones compared to others who are downright unable to pay their monthly credit card bills.
Bank of Korea data showed the country’s card loan delinquency rate hit 2.9 percent in August, an 8-year high. The previous high was 3.1 percent in August of 2015.
The rate was about 1.8 percent in September of last year, but has since inched up to 2.5 percent in February of this year and rose further to 2.7 percent in May.
Separate data from the country’s top credit card companies – Shinhan, Samsung, KB Kookmin, Hana and Woori – showed their combined delinquency rate averaged 1.34 percent as of the third quarter, up from 1.27 percent three months earlier.
The rising figure is a major red flag, according to Lee Ji-eun, head of the Financial Markets Division at the Korea Institute of Finance (KIF).
“Borrowing money to pay off existing debt is a sure sign of how an increasing number of low-income people are forced to the brink of bankruptcy. The central bank’s high policy rate of 3.5 percent is not likely to come down for a couple of quarters, and more low-credit borrowers will find it harder to make a living," Lee said.
Amplifying those fears, according to the senior economist, soured household debt measured by non-performing loans (NPLs) will surge up to 80 percent next year from two years ago. NPLs are loan payments past maturity and are unlikely to be repaid by the borrower.
“The outstanding household debt extended by local banks will soar to between 2.8 trillion and 3.1 trillion won by the end of next year, up from 1.7 trillion won last year,” Lee said.
The bank's financial soundness, however, is not at risk, since they already set aside 23 trillion won in combined loss reserves, achieved a net income of 18 trillion won and possess equity capital of 279 trillion won as of 2022.
Nevertheless, the rapid increase in NPLs at four financial groups is worrying.
The combined NPLs at KB, Shinhan, Hana and Woori came to 7.4 trillion won as of September, up over 2 trillion, or 37.7 percent from 5.39 trillion won nine months ago.
“We are closely monitoring the situation,” a local bank official said.
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