Data show intensifying middle-income debt

An office worker in his early 40s, Lee has become edgy lately as his debt-payment burden is expected to increase this month. Lee purchased an apartment in Jamsil in 2007 with a hefty loan.

Under the contract, he was obligated to pay only his loan’s interest until last month. But starting this month, he has to pay his principal as well. With principal and interest, his monthly payment to the bank is expected to double.

“I knew that eventually I would have to pay the principal, but with what I get paid at work, the higher payment will really affect my family’s financial situation,” Lee said. “I wouldn’t mind if my income had gone up, but it has stayed relatively the same as the company blames the bad economy.”

This is just the beginning as his burden will likely get bigger once the central bank starts tightening its monetary policy citing economic recovery. In May, the central bank lowered the key borrowing rate from 2.75 percent to 2.5 percent to support to the Park Geun-hye administration’s campaign to boost the economy.

The Korean economy in the past two quarters has seen a gradual recovery, advancing from less than 1 percent quarterly growth that lasted for more than two years. Even year-on-year economic growth saw a 3.3 percent expansion in the July-September period. It was the first time gross domestic product was 3 percent or higher since the fourth quarter of 2011.

The economy may be on a recovery track, but many like Lee in the middle-income pool with medium credit ratings are feeling the weight of their debt burden.

According to the financial stability report released by the Bank of Korea yesterday, tighter risk management from financial institutions since 2011 as well as ever-growing jeonse prices have been particularly increasing the burden on middle-income debtors. The report noted that profitability and stability of the financial industry may suffer.

The government, concerned over the accelerating growth of household debt in 2011 and 2012, encouraged financial institutions to better manage risk. This stricter rule forced those with medium or lower credit ratings to seek loans from non-banking private lenders with interest.

At the end of June, total household debt, including credit card purchases, stood at a record 980 trillion won ($923.5 billion). Although it is a 1.7 percent increase from the 964 trillion won recorded at the end of 2012, the overall increase has been slowing.

At the same time, those with a medium credit rating in 2012 accounted for 16 percent of people who have taken out loans from private lenders, an increase from 13.4 percent in 2010.

“There is a risk that those in the middle-income class with medium credit ratings could be shifted down to the lower-income class in the future as they are taking out loans from private lenders instead of banks or other established financial institutions,” said a BOK official.

Those with multiple loans from different institutions also have risen this year. The debt owed by multiple-loan borrowers as of the first half of the year was 307.7 trillion won, which is slightly above the 307.5 trillion won recorded at the end of 2011.

The central bank noted this was largely because more people in the middle-income class with medium credit ratings have been seeking loans from different institutions.

This was a stark contrast from low-income borrowers with low credit ratings who have been reducing their borrowing from multiple sources.

The data also showed that small private entrepreneurs who run operations like restaurants are at high risk. The central bank stated that most of these so-called self-employed businesses were those in the middle-income class with medium credit ratings.

The central bank estimated that the loans borrowed by such entrepreneurs as of the first quarter amounted to 450 trillion won of which nearly 37 percent, or 166 trillion won, were borrowed from non-banking financial institutions.

“Not only is there a rising burden on debt principal payments [for high-risk loans by entrepreneurs], but most of these loans have real estate as collateral,” said a BOK official. “This could further push down the value of real estate.”

Another problem is the rising price of jeonse.

“The recent continuous growth of jeonse prices also could worsen the burden of the middle-income, medium credit rating class,” said a BOK official.

The jeonse price of small and midsize apartments between 2008 and June 2013 grew 36.9 percent and 36.6 percent, which is higher than the jeonse price of larger apartments owned by those in the upper-income class at 22.3 percent.

The report showed that middle-income class loans with collateral for the purpose of paying jeonse or monthly rent accounted for 7 percent and non-collateral loans for the same purpose 13.6 percent, both the highest of any class.

BY LEE HO-JEONG [ojlee82@joongang.co.kr]