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Households’ ability to service debt falling

Sept. 7, 2011 - 19:29 By
South Korean households held an average of 50 million won ($46,620) in debt as of the end of June, data showed Wednesday, fanning concerns that rising household indebtedness may undercut economic growth.

Debt per household reached 50.4 million won as of end-June, given that South Korea’s household credit stood at 876.3 trillion won, according to data by the central bank and the state-run statistics agency.

The result is based on the assumption that the number of South Korean households would reach 17.4 million for this year, according to Statistics Korea. The per capita debt-servicing burden came in at 17.9 million won, data showed.

Meanwhile, amid rising debt and high inflation, the country’s savings rate against disposable income is expected to stay low, according to the Organization for Economic Cooperation and Development.

The rate of Korea’s savings to disposable income is expected to reach 3.5 percent this year, down from 4.3 percent tallied last year, giving it the 21st-highest ranking among 24 major economies.

The data came as South Korea is grappling with snowballing household debt because households’ high indebtedness is feared to dent consumer spending, thereby undercutting economic growth.

But despite the government’s move to curb household debt, home loans extended by local banks and non-bank firms are estimated to have grown by more than 6 trillion won in August alone.

Several local banks halted the extension of fresh household loans in August in an effort to meet the watchdog’s unofficial guideline that set the monthly growth of household loans to around 0.6 percent.

The financial regulator has called for the Bank of Korea to play its part in taming household debt.

Kim Seok-dong, chairman of the Financial Services Commission, said on Tuesday that the BOK should manage aggregate liquidity in a proper manner, remarks widely viewed as calling for the central bank to hike the key rate.

BOK policymakers are in a dilemma as high inflation warrants a rate hike while growing external economic uncertainty prevents them from taking policy action.

Household debt has been on the rise as people have been able to take out loans easily amid the long streak of low borrowing costs, driven by the BOK’s aggressive rate cuts.

The BOK kicked off its tightening cycle in July last year by raising the key rate by a combined 1.25 percentage points to 3.25 percent, but many analysts argue that the central bank was behind the curve in normalizing the soft policy stance.

The central bank’s rate hikes could increase households’ burden to service debt, but a delay in raising the borrowing costs also aggravates their indebtedness. 

(Yonhap News)