The squeeze of debt

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The squeeze of debt

Korea’s total household debt has climbed above the 600 trillion won ($648.7 billion) mark for the first time.
According to the Bank of Korea, third-quarter household debt amounted to 610 trillion won, with the average debt for each household reaching 38.19 million won.
What’s worse, the latest surge in interest rates is putting citizens under a lot of pressure. The average annual home mortgage rate among local banks rose above 8 percent for the first time in more than six years, and the rates for student loans are also expected to climb above 7 percent mark at the start of the spring semester.
So if you’ve borrowed 100 million won, your repayments rise about 2.5 million won a year compared to three years ago. This increase is squeezing people’s wallets and purses, reducing consumption and curbing the vitality of the economy.
We get interest rate hikes when local banks have problems securing financing. The problem is many customers have taken money from their deposit accounts with banks and put it into fund products at brokerage houses. This has made the banks increasingly thirsty for cash.
To get more cash, banks have issued more bonds, including certificates of deposit, pushing interest rates even higher. Higher CD rates mean the burden of debt will rise for home mortgage borrowers since the floating-rate mortgage is linked to the CD rate. In effect, this means that the interest rate burden which banks are facing has been turned over to borrowers.
Korean banks have to change. The banks need to refrain from competition that is just aimed at beefing up their size. They need to change their conventional ways to increase loans, without worrying about the consequences. The old-fashioned way of relying only on income from interest on loans and bank service fees to turn a profit can never help the banks compete against world-class players in the global market.
The government and the Bank of Korea also need to act more quickly. As we know from the 1997-98 Asian financial crisis, it is important to solve small problems in the financial market before they evolve into a market rout.
The interest rates are set according to the market, but it is a major problem if ordinary Koreans are feeling the excessively steep increase. The government needs to make more of an effort to stabilize interest rates and further streamline the system to set the home mortgage rates linked to CD rates.
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