Household debt hits record as pandemic bites and punters bet

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Household debt hits record as pandemic bites and punters bet

Bank loans are being granted at an alarming rate as small businesses seek money to stay afloat during the coronavirus pandemic and as individuals apply for credit to bet on stocks, with punters hoping that the market will recover as the outbreak is defeated.

The growth in credit is unprecedented. Household borrowings from banks in March broke records for a second consecutive month.

According to the Bank of Korea, 9.6 trillion won ($7.9 billion) of credit was extended to them that month. This tops the 9.3 trillion won extended in February, the previous record.

New mortgage totals fell slightly, dropping from 7.8 trillion won in February to 6.3 trillion won in March. But the amount is significant as much of the credit was extended for purchases in specific areas as the government tightened regulations on property purchases in and around Gangnam in southern Seoul.

The unsecured loan category was particularly active and worrisome. In March, households borrowed 3.3 trillion won of this sort of debt, up from the 1.5 trillion won in February.

According to the central bank, much of this money is probably being invested in the stock market. With the benchmark Kospi having fallen more than a third and still down by about 20 percent, many smaller investors are seeing this as the chance for them to get in on the rebound. With credit, they are able to leverage up their positions in the market and profit disproportionately from any recovery in stocks.

Corporations were also active borrowers last month, with many topping up on cash to weather the economic storm cause by the outbreak and as financial markets seized up.

In March, companies took out 18.7 trillion won in loans. That is an all-time high, breaking the previous record of 10.9 trillion won in January 2014.

Loans were taken out across the board.

Chaebol borrowed 10.7 trillion won from banks in March. The businesses went to the banks as the corporate bond market froze up due to the coronavirus outbreak.

Smaller companies were also active borrowers from banks due to the Covid-19 pandemic. They borrowed 3.8 trillion won from banks, a sharp increase from February’s 5.3 trillion won.

Self-employed and owners of small shops borrowed 3.8 trillion won, up from 2.2 trillion won a month earlier.

The trend is likely to hold as the pandemic continues to affect the economy and drive businesses and individuals to the credit markets to tide them over and bridge their finances.

The government’s efforts to fight the coronavirus downturn with cheap and easy funding are also contributing to the trend. It is supplying 3.5 trillion won of low-interest loans to small businesses through banks.

Non-banking financial institutions, including credit card issuers and insurance companies, are adding to the ballooning debt extending the maturity on small business loans for at least six months, rolling over the obligations.

Concerns are on the rise that the apparent generosity by the government and by institutions will ultimately burden the banks and their balance sheets. The stimulus could end up creating bigger problems down the road.

“The capital of Korean commercial banks is not sufficient compared to banks in advanced economies,” said Seo Young-soo, an analyst at Kiwoom Securities. “If the Covid-19 impact becomes extensive and not temporary, it could weaken the ability of the financial companies to come up with funding due to the overextended balance sheets.”

The analyst said while it is important to add funding, it is best to ask companies that were struggling even before Covid-19 hit to restructure.

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