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[EDITORIAL] Household Debt Rising Too Quickly

Mar 24,2001
Household loans are increasing at a fast rate, and it is worrisome that this trend could spur household bankruptcies everywhere and hinder the nation's economic recovery. According to the Bank of Korea on Friday, household loans increased by 48 trillion won ($37 billion) during the last year alone. If households' purchases of goods on accounts are added, the total increase in household debts last year will reach 51 trillion won. This is a big jump compared to the 30 trillion won rise in 1999. At the end of last year, household loans accounted for almost 50 percent of total loans extended by financial organizations. If household bankruptcies break out everywhere, the nation's financial industry, which has been reeling from a pile of non-performing loans by corporate clients, will receive another blow.

Generally, household borrowing flows into consumption, investment and an opening of new businesses, which contributes to expanding economic growth. The nation's retail banking sector is lagging, as evidenced by the generally inhospitable treatment that financial organizations give customers when they apply for loans.

What concerns us is that household debts are rising too quickly. The number of unemployed people just broke the 1 million mark in February and there is a rising fear over the longer-than-expected economic recession due to a high probability that the United States and Japan will experience a hard economic landing. The steep rise in household debt could create a vicious circle starting with household bankruptcies, dampened consumption, continued economic recession and more bankruptcies. It has been reported that 40 percent of individual stock investors have borrowed their investment funds from financial institutions. If the stock markets do not recover quickly, more bankruptcies may be on the way.

The rise in household debts is mostly from credit card loans with interest rates of over 20 percent. In 1999, these loans increased by 2 trillion won, but in 2000 they quadrupled to 8 trillion won. We should devise ways to reduce individuals' interest burden. Credit card companies should end their protest against the Fair Trade Commission's order to lower lending rates and fees. The government should also review the consumer bankruptcy system, under which bankrupt persons must quit their jobs.


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