The Bank of Korea has once again warned of household and corporate debt growth. In its latest Financial Stability Report, the central bank said financial stability risks rose compared with six months ago due to a decline in the financial soundness of the household and corporate sectors. Policymakers should heed the bank’s repeated warnings.

The report showed household debt rose by 10.4 percent on-year to total 1.17 trillion won at end-September. It notes that the pace of debt increase has continually grown since the third quarter of 2014, due mainly to brisk housing purchases.

The household debt-to-disposable income ratio stood at 143 percent in September, an increase of 5 percentage points from March. 

The ratio of household debt repayment expenditures to disposable income marked 41.4 percent in the second quarter of 2015, up 2.7 percentage points on-year.

In the corporate sector, sales have fallen significantly, worsening corporate financial stability. In the first half of 2015, sales fell by 7.1 percent on-year, led by a 7.3 percent negative growth for big businesses. Small and medium-sized enterprises saw their sales growth slow from 3.8 percent to 1.2 percent.

Sluggish sales resulted in debt increases. The proportion of corporations with debt ratios of 200 percent or above rose from 12.3 percent in December 2014 to 12.9 percent in June 2015.

The proportion of companies with interest coverage ratios below 100 percent increased from 33.5 percent to 35.3 percent during the same period.

Among companies subject to external audits, the number of chronically marginal companies -- zombie firms unable to cover their interest expenses with operating incomes for a long period of time -- rose by 710 during the past five years, topping 2,560 in 2014.

The central bank noted that the continuing sluggishness of corporate sales since 2013 has amplified concerns about corporate growth potential.

It also warned that the continued rise in the number of marginal and chronically marginal companies could threaten the stability of the financial system should external and internal shocks occur. 

As a result of the rise in household and corporate debts, the Financial Stability Index rose from 3.5 in April 2015 to 5 in October, although it still remained below the “warning” level of 8.

The central bank’s report has confirmed once again that Korea’s household and corporate debt has reached a level where remedy is urgently needed.

Following the report’s release, officials of the Financial Services Commission stepped forward to ease concerns about the debt problems.

They said the government has already started to address the problems raised by the report. Yet this explanation is hardly convincing in light of the worsening situation. Instead of dismissing the report, policymakers need to redouble their efforts to tackle the problems.