[FORUM]Consumer debt blame widespread

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[FORUM]Consumer debt blame widespread

"Do you think a zucchini will become a watermelon just because you painted some stripes on it?:

The point of this absurd question is that changes in the packaging or standards often mislead people when there is nothing different in the substance of the object.

Ssangyong Motor's Musso Sport was first classified a truck by the Ministry of Construction and Transportation, but the Finance Ministry reclassified it as a passenger vehicle to collect special consumption taxes on it. Then the United States, with a pickup truck about to be marketed here, put pressure on Seoul to sidestep the tax, and the government gave in, designating the Musso Sport as it was originally -- a truck.

Some time ago in the United States, mobile homes, once classified as automobiles by transportation officials, were regrouped as residential properties. After that, the purchase of a mobile home became an investment, not a household consumption, and it raised household savings rates.

Recently, banks here started calling loans to small private business owners "business loans" instead of household loans as they were once known. This curious move was triggered by an alarming rate of household indebtedness. Following a steady increase, household debt rose to the equivalent of 75 percent of the gross domestic product at the end of September, equaling 424 trillion won ($350 billion). The number of borrowers with bad credit exceeded 2.5 million. There has been talk of "an internal debt crisis," just as external debt was the culprit of the financial crisis in 1997. Classifying some household loans as business loans and easing conditions for repayment would help reduce the number of bad debtors, but will not solve the fundamental problem.

Responsibility for the sharp increase in consumer debt rests first with consumers, but the government and banks cannot be completely immune to criticism. It is time for the banks, especially, to take a good look at themselves. They have already been through debilitating problems with uncontrolled, outstanding loans serious enough to be put on a life support system and fed with public bailout funds. But little has changed in the banks' practices. Those practices, in fact, have helped to create a situation conducive to another crisis.

When there is real estate collateral, banks compete against each other to get more people to take out loans, asking almost no questions about income or creditworthiness. New credit cards are dispensed at staggering rates.

Perhaps the biggest lesson we ought to have learned after going through a financial crisis five years ago is the importance of credit and risk management. But banks have obviously failed to heed that lesson and engaged in business that can undermine the foundations of a credit-based society.

It is time for banks to remember a lesson: equip themselves with proper financial tools and go back to the orthodox way of handling loans.

Credit analysis for individuals should be a necessary procedure, and loan decisions must be based on the use of funds, a review of the economy and the real estate market. Prospective borrowers who are less than creditworthy must be put at a disadvantage so that they think about the consequences of their financial mismanagement. These should be done in a comprehensive system of credit management.

There are some people who are concerned about a possible economic slowdown and how it can trigger another crisis or a long-term recession, such as Japan's, if the consumer debt problem is handled badly. But there will only be a bigger problem waiting if a chance to take proper action is lost just because everyone fears what might go wrong.

The level of consumer debt now is not quite at a level that a full-scale overhaul of credit management practice might trigger a financial crisis. The crisis of five years ago was different, for the creditors were foreigners. When they wanted their money back, there was no way around it.

Today, the creditors are Korean banks, and there is a luxury of being able to ask for some flexibility. The banks will probably not cut back on credit availability to the degree that will cause a social problem.

* The writer is the director of the JoongAng Ilbo Economic Research Institute.

by Ro Sung-tae

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