No quick fix for household debt

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No quick fix for household debt

The country’s snowballing household debt calls for immediate attention with our accelerated delinquency rate. Outstanding household loans at financial institutions total 912 trillion won ($799 billion). The debt growth rate has slowed slightly not because consumers are better off, but simply because they cannot afford or are not eligible for new loans due to worsening economic conditions. Debt does not pose a problem if it can be repaid. But the delinquency rate in bank loans to consumers in May jumped 0.97 percent due to the economic slowdown, stagnant income and fall in housing prices. Loans sought by a lower income group, self-employed businessmen and multi-creditors simply to meet their living expenses are also growing sharply.

So far financial authorities refrain from ringing alarming bells, assessing household debt to be manageable. But the Organization of Economic Cooperation and Development and Moody’s Investors Service warned that unlike the corporate and public debt sector, the country’s household debt poses a risk and that at least 10 percent to 20 percent could turn bad upon external shock or a plunge in housing prices.

The Financial Supervisory Service encouraged banks to lower lending rates to “risky” borrowers and extend a workout program requiring them to repay over a longer scope of time. The Finance Ministry is studying to pump in extra budget to set up a public insurance institution to guarantee consumer loans to ease consumers struggling under nonbanking sector loans of deathly interest rates of over 20 percent. They are stopgap measures to cover the borrowing rates between banks and the nonbanking sector. The Bank of Korea should move in sync with the government and increase liquidity to up the lending cap at financial institutions.

Government offices and the central bank must work together. They must offer relief for multi-creditors and prevent a slump in the real estate market from hurting financial lenders. Authorities could consider a temporary lifting of acquisition and transaction taxes to stimulate the housing market. Financial institutions should study the affordability of lenders, and supervisory authorities must strengthen their oversight in health of household loans. In the long run, the economy must be stimulated and more jobs created in order to raise income for families and help repay their debt. The government needs to take more aggressive action for a more fundamental solution.

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