Policy mismatch leads to surge in household debt

The Korea Times

The Korea Times

Finance

Wed, November 29, 2023 | 04:49

Economy

Policy mismatch leads to surge in household debt

Posted : 2023-08-23 17:02

Updated : 2023-08-24 12:14

A signboard directs customers to the personal loans and small business loans section at a commercial bank in Seoul, Monday. Yonhap

By Yi Whan-woo

The government and the central bank are apparently out of sync in bringing down household borrowing, which accelerated at its fastest pace in nearly two years and hit a record high of 1,068.1 trillion won ($797 billion) last month.

The July figure comes as the Ministry of Economy and Finance, joined by the Financial Services Commission (FSC) and the Financial Supervisory Service (FSS), have been persuading commercial banks to offer lower borrowing rates for would-be homeowners.

The government has also come up with a state-backed housing loan program, which facilitates would-be homeowners to borrow up to 500 million won, irrespective of their income, if a house they want to buy costs 900 million won or less.

Under the circumstances, mortgages, which account for the majority of household debt, went up by 5.95 trillion won in July from the previous month.

Such month-on-month increases were the sharpest since September 2021 when the amount stood at 6.4 trillion won.

In particular, commercial banks added to the increase in household debt with the introduction of mortgages with a maturity of 50 years.

Such maturity allows more borrowers to be less burdened with repayments, which are determined by the debt service ratio (DSR), which measures how much a borrower has to pay for the principal and interest relative to yearly income.

Correspondingly, the outstanding balance of loans taken out by households from commercial banks reached 1068.1 trillion won last month, the highest since relevant data was compiled by the Bank of Korea (BOK).

For the second quarter, households' outstanding balance of loans from financial institutions and credit purchases ― combined ― amounted to 1,862.8 trillion won.

The aforementioned measures taken by the government concerning loans are in contrast to the BOK's monetary tightening campaign that lasted for nearly a year and a half until January.

The base rate was hiked by 3 percentage points to 3.5 percent. It remains steady as inflation is softening in line with the BOK's projection.

During a parliamentary interpellation session, Tuesday, BOK Governor Rhee Chang-yong hinted at a need to revise the government's loan-related policy.

"Household debt will pose a serious problem if it continues to grow at an alarming pace," he said.

He went on to say, "A range of measures should be taken during a joint meeting with fiscal and monetary policymakers presided over by the finance minister."

In a separate interpellation session, Deputy Prime Minister and Minister of Economy and Finance Choo Kyung-ho said the government will "ensure risks associated with household debt do not threaten growth."

yistory@koreatimes.co.kr