[Editorial] Loud alarms on household debt

Financial institutions must bolster their loss reserves and capital more than anything else.

Alarms are going off louder for household debt. The risk for the Korean economy has deepened amid volatility in global capital markets following the Silicon Valley Bank collapse. The delinquency rate shot up after the base rate jumped from 0.5 percent in August 2021 to 3.5 percent in Korea in less than two years. Households with highly-dangerous debts larger than their assets also have been on the rapid rise. For them, the interest rate burden would have ballooned by billions of dollars after the hike.

According to Rep. Yang Jung-suk, an independent, deferred payment in mortgage-backed loans by five major lenders — including banks, mutual savings banks and insurers — surged 54.7 percent on year to slightly over 1 trillion won ($769 million) by the end of 2021. The fall in property prices made matters worse.

Unsecured credit loans translate into an immediate risk for the financial sector. The balance in personal credit loans fell, but the delinquent amount only increased to exceed 2 trillion won for the first time. Although banks have cut credit loans, the lending increased by savings banks caused the rise in the delinquency ratio.

According to the Bank of Korea (BOK), the number of households who cannot pay off their debt after liquidating their assets exceeded 615,000 last year, doubling from a year ago. The debt service ratio (DSR) of total household debtors reached a 40.6 percent, breaking the 40-percent threshold for the first time since 2018. The ratio means 40 percent of household income goes to pay off debt.

Those with a DSR exceeding 100 percent, which means the debtors need more debt to meet their loan dues, also topped 8.9 percent. The BOK said the risk across overall households remains low. But Choo Kyung-ho, deputy prime minister for economic affairs, fears that uncertainties could increase if the intensive tightening in governments worldwide continues.

The alarm bells are sounding from various data. The Financial Stress Index (FSI) hit 21.8 last month, hovering at a crisis level for the fifth month. The FSI, based on data affecting financial stability, has been rising due to the surge in household debt from interest rate hikes and the fall in property prices on top of deepening risks from property project financing. Korea’s financial system could shake at external shockwaves like banking crises overseas. Our financial authorities must prepare contingency measures to address such risk factors preemptively. Financial institutions also must bolster their loss reserves and capital more than anything else.