Debt is dilemma for BOK

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Debt is dilemma for BOK

Amid concerns about fast-growing household debt, analysts are watching the Bank of Korea (BOK) and financial regulators to see if they will take steps to stem borrowing.

In a recent report, the Bank Of Korea warned that the number of households with elevated default risks has reached 1.5 million, and their outstanding debts total 400 trillion won.

Households with higher default risks refer to those with more debt than financial assets, or households that use more than 40 percent of their net income to cover loan payments.

Total outstanding household debt, including from banks and non-bank financial institutions such as insurance firms and brokerages, was estimated to be over 1,100 trillion won as of the end of May and rising by record rates.

One sure way to stem the debt growth is by raising the key interest rate, which currently is at a record low of 1.5 percent.

But the government is bent on spurring growth, which has slowed sharply because of a drought and the outbreak of Middle East respiratory syndrome (MERS).

The Bank of Korea last week lowered its economic outlook to 2.8 percent from the previous 3.1 percent, citing MERS and the drought.

Experts say despite the government’s concerns about the economy, the BOK may have to raise its key interest rate when the U.S. Federal Reserve moves up its rate, widely speculated to take place within this year.

“Given the positioning of the Korean economy, it probably cannot maintain the current monetary stance independent of the U.S.’s monetary stance changes,” said Song Min-ki, an economist at the Korea Institute of Finance.

Meanwhile both the central bank and financial regulators are said to be mulling new lending rules that may help curb lending to households that are financially unfit.

A coalition, including the Ministry of Strategy and Finance, the Financial Services Commission and the Bank of Korea, is working on measures that would encourage households to pay interest and principle payments at the same time, rather than interest alone for an extended period.

Interest rates on loans that only require interest payments for an extended period will be designed to be higher than loan products that require borrowers to make interest and principle payments simultaneously.

“The focus of the new measure is to encourage more robust installment payments of household debts,” said a regulatory official.

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