South Korea's household debts reaches record high

On November 24, the Bank of Korea reported that South Korea’s household debt reached a record-high volume of 1,295.8 trillion won ($1.1 trillion) in the third quarter of this year. Combining the additional household loans of 7.5 trillion won from local banks, the Bank of Korea points out that household debt has already exceeded 1,300 trillion won, increasing at “a much faster pace than previously anticipated.” “Since banks recently adopted a stricter screening process for loans, people turned to non-bank institutions with higher interest rates such as credit unions,” said Lee Sang-yong, the head of the financial statistics team at the Bank of Korea. Non-bank institutions’ high interest rates have contributed to the rapid growth of household debt.

In order to manage massive household debts, the South Korean government plans to institute a new warning system to signal systemic banking crises. The government also plans to tighten the restrictions on non-bank financial institutions’ lending practices. These stricter rules aim to reduce household loans from non-bank institutions.

Fortunately, according to the

(FSC), South Korea’s main financial regulator, the growth rate of household debt seems to be in a decline after reaching its peak. The greatest financial risk, however, persists in the interest rate. Even a one percentage point increase in the interest rate leads to a significant rise in the debt payment burden of 11 trillion won per year. Yim Jong-yong, the chairman of the FSC, has defined a possible raise of interest rate as a “core risk factor” that can discourage economic growth.