Rising Debt Spurs Fear Consumers Face 'Trap'

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Rising Debt Spurs Fear Consumers Face 'Trap'

With consumer debt growing faster than personal income, financial industry officials warned Monday that individuals may find themselves caught in a "debt trap."

The Bank of Korea reported that the average consumer debt per household stood at 19.3 million won ($15,000) during the first quarter, up 24 percent from the same period a year ago.

Disposable income, however, grew by less than 10 percent for the quarter. The average household was also spending more than 10 percent of its disposable income on interest payments, the central bank said.

The bank said the average individual consumer carried 5.2 million won in debt at the end of 1999 and had paid 760,000 won in interest that year. The average debt load was equivalent to 73 percent of disposable income.

In 20 years, consumer debt has grown about 40 times, from 6.1 trillion won at the end of 1980 to 294 trillion won at the end of 2000. But income levels rose just 14 times during the same period, the central bank said.

"What we are concerned about is the possibility of negative savings," said Park Jong-kyu, an analyst at the Korea Institute of Finance. Negative savings, when consumer spending exceeds personal income, is regarded as an obstacle to economic recovery in the United States.

A primary cause behind the increase in debt is the shift following the financial crisis in 1997 by financial institutions toward consumer loans, the central bank said.

In the two years between the end of 1998 and 2000, the number of consumer loans rose by 22 percent, while business loans increased by just 10 percent. During the first half of this year, nine commercial banks cut 1.3 trillion won from total outstanding business loans while adding 13.4 trillion won to consumer-loan portfolios.

An increase in the number of younger borrowers with poor credit records is also causing alarm. "The high debt ratio by young people could mean that a lot of the loans could go bad," said Sogang University professor Cho Yoon-je.

The central bank also said that the average interest load borne by Korean consumers was more than three times the burden carried by American or Japanese borrowers. The average Japanese consumer paid 3.2 percent of disposable income as interest on loans, while the average American borrower paid 3 percent.



by Cheong Chul-gun

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