A household debt crisis

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A household debt crisis

Korea’s household debt reached 1,468 trillion won ($1.3 trillion) at the end of March, tantamount to 85 percent of the country’s 2017 gross domestic product of 1,730 trillion won. Tighter mortgage-backed lending rules have helped slow the gains, but household debt remains a colossal problem to the economy.

The government has not been doing its best to restrain the alarming household debt. According to the minutes of the monetary policy committee meeting of the Bank of Korea in May, rent lending and overdraft were behind the increases in bank loans to individuals. Lending for rent fees took up 80 percent of housing-backed loans. Rent lending backed by state entities is excluded in the debt-service-ratio that financial institutions must apply in judging the proportion of new loans based on gross income spent on housing-related payments. Banks can be more relaxed in extending the loans and many are eager in marketing them by offering more favorable rates to keep up interest rate income against tougher regulations on other housing-related loans.

The U.S. Federal Reserve has accelerated normalization in lending rates amid faster recovery in the economy. Of Korean household debt, 77 percent are lent in floating rates. Higher interest rates could quicken the ticking bomb of household debt. Housing-backed lending rates of commercial banks average 3 to 4 percent range. But once U.S. interest rates go higher to an average of 2.4 percent by the end of the year, bank loan rates could hover above 5 percent.

Yoon Suk-heun, governor of the Financial Supervisory Service, warned the household debt problem could expand due to higher market rates and volatility. He named the loans to self-employed businesses, credit line and rent lending as the biggest dangers. Higher interest means a heavier burden for the low-income class, whose jobs and income are at risk due to the minimum wage spike.

JoongAng Ilbo, June 18, Page 30
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