Household debt approaches $1tr

Borrowing from secondary banking sector increases


Korea’s household debt is on track to exceed $1 trillion by 2013 due to growing spending tied to mortgage payments and daily necessities, fueling concerns about domestic financial fragility.

Outstanding household credit, including loans from commercial banks and the secondary banking sector, rose to record high of 892.5 trillion won ($791 billion) at the end of October, up 45.6 trillion won or 5.4 percent from a year earlier, according to the Bank of Korea. The amount is projected to reach $1 trillion in one or two years should the current growth rate continue.

“Borrowing from insurance companies jumped 3 trillion won in the third quarter, compared to the 500 billion won increase in the preceding quarter, which looks to be a result of the strengthened restriction on loans at commercial banks and the rising costs of living,” said a central bank official.

The new high came despite a set of measures adopted by the government to curb the debt level. The Financial Services Commission since June has been tightening bank’s loan-to-deposit ratios and their lending practices, but this has channeled the needs to the secondary banking sector, increasing loans by savings banks and credit card companies.

“More borrowing from the secondary banking sector means more people are cornered into turning to high-interest loans or are taking out more debt on top of what they owe at commercial banks,” Jeong Young-Sik, a research fellow at Samsung Economic Research Institute said.

Borrowing from the secondary banking sector often represents more debt from impulsive spending and daily necessities, a sign that the worsening business sentiment is hitting the low-income basket.

Korean households now owe 391.29 trillion won, or 46.5 percent of their total debt, to credit card companies, insurance companies and other non-bank institutions, the BOK said. Debt from the secondary banking sector made up 40 percent of total debt on average in 2006.

By Cynthia J. Kim (cynthiak@heraldcorp.com)