Control household debt

It is no longer news that household debt has reached a record high. But the pace and details of growth should nevertheless be alarming. While income has remained stagnant, debt surged by double-digits in 2015 and 2016.

Household credit stood at 1,344 trillion won ($1.17 trillion) as of the end of last year, according to Bank of Korea data. Annual and quarterly gains have been the highest since the data was first compiled in 2002. Household debt in the fourth quarter grew nearly 48 trillion won, tantamount to full-year growth in 2012.

Loans accelerated faster in the non-banking sector due to tighter regulation at banks. High-interest non-banking institutions upped their marketing to draw customers when banks tightened loan regulations. Most of their customers have low-income and poor credit. If their loans sour, financial instability is inevitable. Loan burdens would make low-income lives worse and increase sluggishness in consumption as well as trigger various social problems.

The series of government actions to rein in household debt such as tougher loan guidelines and real estate regulations have ended up only containing lending in banks. The risk has moved to the non-banking sector.

It is natural for private-sector debt to increase when the economy becomes bigger. But the household debt load is excessive for the economy and unhealthy. The International Monetary Fund last year has been warning of swelling household debt. It advised watch over non-banking debt and demographics in borrowers. It also recommended an amendment to the country’s unique jeonse rent system and housing loan practices. The government must strengthen risk control management in the non-banking sector.

JoongAng Ilbo, Feb. 23, Page 30