Household debt continues to climb

Financial authorities see Korea’s household debt mountain growing steeper in the coming months as banks continue to exploit the demand from families struggling to keep up with the rising costs of living.

Amid increasing concerns that the historically high level of personal indebtedness is posing a serious threat to the country’s financial stability, the Financial Services Commission (FSC) has declared war on irresponsible lending and is pressing commercial banks to strengthen their guidelines for giving loans.

However, the inexorable rise in household loans leaves the financial regulator little to show for their efforts. It can’t be too stern in its clampdown when growth-first policymakers are desperate to extend borrow-to-spend habits in the face of faltering exports.

Household loans issued by commercial banks are expected to collectively increase by 24.5 trillion won (about $22 billion) in 2012, according to the firms’ business plans submitted to the Financial Supervisory Service (FSS), the FSC’s executive supervisor. This would represent the sharpest rise since the 24.9 trillion won increase during 2008, and push bank debt amassed by consumers closer to the 500 trillion won barrier.

Consumers here owed 453.6 trillion won to banks as of the end of 2011, accounting for about half the money they borrowed from financial companies, which also include credit card firms, insurance providers and secondary lenders.

When combining non-interest paying debt and borrowing by the self-employed and non-profit organizations, the personal debt measurement exceeds one quadrillion won, meaning Koreans owe more money than the economy will generate in an entire year.

According to FSS data, about 50 trillion won in mortgages provided by the four major banking groups ― KB, Woori, Shinhan and Hana ― are set to mature this year, which has alarm bells ringing louder on the household debt burden.

The borrowing binge in past years had been driven by speculative demand for property, which has left millions trapped in negative equity after the housing market collapsed with the fall of Lehman Brothers.

The recent growth in household debt appears to be fueled more by people having to borrow money simply to fund day-to-day living as their purchasing power continues to erode on stagnant wages and high inflation.

And the strengthened lending restrictions on banks seems to have backfired by forcing households to take on riskier credit, such as borrowing from non-banks and taking unsecured or multiple loans.

Banks are less willing than before to touch mortgages, as the housing market continues to engage in what may prove a Japanese-style dive. However, they are expecting their profits to jump in non-property loans, which provide higher margins in interest rates, the FSS said. Families, on the other hand, will struggle that much more to keep up with repayments.

“The banks appear to be focusing more on personal loans and other types of credit that aren’t backed by property,’’ said an FSS official.

“While they expect a 16.8 trillion won or 5.5 percent rise in mortgages this year, that would be lower than the 10.2 percent rise in 2009 and the 7.5 percent rise in 2011. They expect a 7.7 trillion won or 5.2 percent increase in other types of loans, which would mark the quickest annual growth since 2007.’’

Policymakers, such as Bank of Korea (BOK) Governor Kim Choong-soo, have claimed that the country’s level of household debt is broadly manageable. However, critics accuse these authorities of playing with fire, pointing to a household debt to disposable income ratio that is speeding toward 160 percent.

While jolting consumption and reducing household debt are key for Korea, as worsening global conditions threaten to derail its fragile recovery, it’s clear which issue the government is more concerned about.

In announcing its economic policies for 2012, the Ministry of Strategy and Finance said it will press banks to lower interest rates on loans to reduce family burdens on servicing debt and ease property-related taxes to fix the dearth in property transactions.

The ministry is basically saying that the fate of the economy rests on consumers’ ability to take on even more debt when they already owe more than the gross domestic product (GDP). The outcome could be grotesque. <Korea Times/Kim Tong-hyung>

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