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Households' financial soundness worsens on rising debt: central bank

All Headlines 12:00 June 30, 2015

SEOUL, June 30 (Yonhap) -- Financial soundness of South Korean households worsened in the first quarter as their debts snowballed on the back of low interest rates, a report showed Tuesday, adding to persistent concerns that a looming U.S. rate hike may unleash credit risks.

"In the household sector, the size of household debt sharply increased as home sales rose amid a lack of improvements in income circumstances," the Bank of Korea (BOK) said in its financial stability report.

Household debt totaled 1,099 trillion won (US$982 billion) as of the end of March, growing 7.3 percent from the previous year. The sharp rise in household debt jacked the debt-to-disposable income ratio up by 2.7 percentage points from the end of September, the report showed.

The report warned that fluctuations in interest rates and property prices may further heighten possible risks stemming from the country's sizable household debt.

The ratio of "risky households" is forecast to jump to 14 percent from 10.3 percent when the interest rate rises by 3 percentage points, while a 15 percentage point drop in property prices is likely to hike the figure to 13 percent, according to a stress test of households.

When a 2 percentage point rise in the interest rate and a 10 percentage point fall in property prices occur simultaneously, the ratio of such households is likely to reach 14.2 percent.

Risky households refer to indebted households whose debt service ratio exceeds 40 percent and whose financial liabilities are bigger than financial assets. It also includes households whose debt is seen as excessive although they do not accurately fit into the classification.

The report comes as a continued rise in household debt is feared to trigger financial risks and constrict household consumption.

Households have been borrowing more from lenders following a series of rate cuts by the central bank aimed at bolstering growth. Since August last year, the BOK has lowered the rate by a total of 1 percentage point to a record low of 1.5 percent.


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