Even the quality of our big household debt is bad

As much as the size of household debt remains a major economic risk, so is the deteriorating quality of such debts.

A central bank report yesterday raised concerns about debtors with several loans from multiple financial institutions, not only in commercial banks but also at nonbanking companies as well as private lenders with high interest rates.

According to the report submitted to the National Assembly, since the end of 2010, those with loans from two or more financial institutions grew from 3.18 million to 3.31 million at end of 2012. However, those who used private lenders in addition to commercial banks or nonbanking financial companies jumped 23 percent, from 990,000 to 1.3 million.

The average interest rate of loans from commercial banks was 4.54 percent at the end of last year and 4.55 percent at the end of March. Interest rates, however, move close to 10 percent for those who borrowed without collateral.

Still, that is lower than the 15 percent to 25 percent rates charged by noncommercial banking sources, such as savings banks and credit card, capital and insurance companies.

Interest rates on loans from private lenders can legally be as high as 39 percent.

Yet more people are taking out such loans.

Based on a study by the credit rating agency NICE, at the end of 2012, commercial banks accounted for 29 percent of loans to those with credit ratings between seven and 10, with 10 being the lowest rating. Two years ago, commercial banks handled 30.7 percent of those loans.

And total borrowing from private lenders has grown from 4.6 percent at the end of 2010 to 5.5 percent last year.

The central bank said more people are driven to private lenders because financial companies have stepped up their risk management in the past two years. The government is concerned over the ever-growing household debt, which reached nearly 960 trillion won ($872 billion) at end of 2012, and has been pressuring banks to reduce lending.

The central bank noted that as a result, those with low credit ratings and low income are at greater risk of insolvency.

The rate of past due payments at private lenders has gone from 5.8 percent to 9.4 percent during the same period.

In addition, older people are at far greater risk than younger borrowers. The number of multiple loans to people in their 40s decreased the past two years and increased to those in their 50s and 60s.

With baby-boomers retiring, the situation is likely to get worse.

“Since the second half of 2012, economic risks outside Korea, including the uncertainty of the U.S. economy, have improved,” said a Bank of Korea official. “However, as the nation’s economic recovery continues to remain in a stalemate with household debt-to-income slightly increasing, households’ ability to repay their debt has failed to improve.”

By Lee Ho-jeong [ojlee82@joongang.co.kr]