Credit risk index, highest since statistics
Household credit increased by 270 trillion after Corona
Interest burden rises due to rising interest rates… hard landing concerns
| On the 12th, citizens are doing banking work at a bank counter in Seoul. yunhap news |
[헤럴드경제=김현경 기자] Households that have increased their loans since the COVID-19 crisis are at risk of a surge in credit risk due to the increased interest burden. There are concerns that a hard landing in household debt could have a major impact on the overall economy.
According to the ‘Financial Institutions Lending Behavior Survey Results’ recently announced by the Bank of Korea (Trends in the 4th quarter of 2022 and outlook for the 1st quarter of 2023), the credit risk index expected by domestic banks in the first quarter of this year was 45, compared to the fourth quarter of last year. (41), it rose by 4 points, the highest since 2002 when related statistics were available.
In particular, household credit risk stood at 44, up 5 points from the fourth quarter (39), the highest level in 19 years and six months since the third quarter of 2003 (44).
Non-bank financial institutions such as savings banks and credit card companies also expected credit risks to rise in the first quarter. The credit risk index for borrowers of mutual financial associations was 51, the highest since the corona pandemic, and mutual savings banks (45), credit card companies (25), and life insurance companies (40) also maintained high levels.
Households whose lives have been difficult since the corona pandemic have increased their loans. Household credit stood at 1,870,613.8 billion won as of the third quarter of last year, an increase of 270,131 billion won (16.9%) from the fourth quarter of 2019 (1,600,600.7 billion won) before the outbreak of the corona.
Korea’s household debt-to-GDP ratio is 105%, the highest in the world. In particular, household debt with a maturity of less than one year accounts for about one-third of the total, and about 80% of household debt consists of floating rate loans.
The problem is that as the benchmark interest rate has risen since then, the lending rate has also risen. As of December 2019 alone, the interest rate on household loans from deposit banks, which was 2.98% per year (based on the amount of new transactions), nearly doubled to 5.57% in November 2022. As a result, the interest burden on households has increased and the financial soundness of vulnerable borrowers has deteriorated.
In addition, as the second financial sector is expected to raise the loan threshold for soundness management amid internal and external economic uncertainty, vulnerable borrowers who have been using the second financial sector may experience greater difficulties. The loan attitude index of mutual savings banks in the first quarter was -45, credit card companies -31, mutual credit unions -52, and life insurance companies -19. If the lending attitude index is negative (-), it means that the number of financial institutions that responded ‘strengthening lending attitude’ is greater than ‘relaxing lending attitude’.
There are many voices of concern that a hard landing in household debt could make our economy more difficult.
Jeong Yu-tak, a researcher at Hana Financial Management Research Institute, pointed out, “In a situation where household, corporate, and government debt has soared since the pandemic, it is necessary to pay attention to the increase in debt risk due to accelerated financial tightening and falling asset prices.”
BOK Governor Lee Chang-yong said, “Korea’s household debt structure serves as a factor that complicates monetary policy decisions.” “The sensitivity of consumer spending and the economy may be greater.”
In response, the financial authorities asked the banking sector to make efforts for a soft landing of household debt.
Lee Bok-hyeon, head of the Financial Supervisory Service, requested, “Efforts to improve the loan structure, such as establishing a loan screening practice based on repayment ability and reducing the proportion of floating rate loans, while providing preemptive debt counseling and support to borrowers concerned about insolvency.”