Growth in household debt is slowing

Household borrowing from banks slowed in November as interest rates rose and the government pressed banks to cut lending.

A customer applies for loan at a Hana Bank branch in Seoul last month. [YONHAP]

Household borrowing from banks slowed in November as interest rates rose and the government pressed banks to cut lending.

Many borrowers turned to non-banking financial institutions, which offered easier terms.

According to data from the Bank of Korea on Wednesday, total bank loans to households in November increased by 3 trillion won ($2.5 billion), or 0.28 percent on-month, in November, much smaller than the 5.2 trillion won, or 0.5 percent increase in October.

By type of loans, new mortgages issued by banks went from 4.7 trillion won in October to 2.4 trillion won in November, a 49 percent decrease in a month.

Other types of new loans, mostly unsecured loans, totaled 500 billion won last month, about the same as in October.

The central bank said that government's policies, rising interest rates and seasonal effects slowed household borrowing.

According to the Financial Services Commission (FSC) on Wednesday, though, household borrowing from second-tier non-banking financial institutions like savings banks increased rapidly in November. Despite their label, savings banks in Korea are more like consumer finance companies.

Second-tier institutions have traditionally been more welcoming to borrowers with weak credit histories. As commercial banks suspended some of their lending programs and reduced lending limits, savings banks and credit cooperatives rose as alternatives.

According to the FSC, household lending from all types of financial institutions increased by 5.9 trillion won in November, less than the 6.1 trillion won increase in October.

Lending by second-tier non-banking institutions increased by 2.9 trillion won in the past month, nearly three times the 1 trillion won new lending in October. The largest increase was from credit cooperatives, which extended 2.1 trillion won in fresh loans in November.

It is likely to be even more difficult for households to borrow next year.

While the government set 6.99 percent as a target for on-year household debt growth this year, the target will be reduced to between 4 and 5 percent next year.

A major issue is loan qualification standards such as the debt service ratio (DSR), which decides how much a customer can borrow relative to income.

From next year, the DSR must be kept at below 40 percent for borrowers from commercial banks.

This means principal and interest payments on loans will be limited to 40 percent of income.

BY KIM JEE-HEE [kim.jeehee@joongang.co.kr]