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(LEAD) Gov't vigilant about self-employed people's debt problem

All News 15:47 January 15, 2017

(ATTN: UPDATES with view on economic impact in last 4 paras; ADDS photo, byline)
By Lee Chi-dong

SEOUL, Jan. 15 (Yonhap) -- South Korea's financial authorities are increasingly concerned about the debt risk of self-employed people, striving to address the chronic household debt problem, officials said Sunday.

Household credit in the major Asian economy totaled 1,295.8 trillion won (US$1,098 billion) as of end-September last year, up 11.2 percent from a year earlier. The volume has apparently exceeded 1,300 trillion won, given the trend of monthly growth.

Announcing its policy direction for 2017, the Financial Services Commission (FSC) said handling the household debt issue will be a top priority.

In a positive sign, an increase in the amount has slowed a bit since the government took a set of policy measures in October last year, which include the expansion of tighter screening of borrowing qualifications, according to the regulator.

Loans extended by banks to households here rose by 19.7 trillion won in the last quarter of 2016, less than 23.3 trillion won posted during the same period of the previous year, showed its data.

"In the current stage, household debt is at a manageable level in general," said Doh Kyu-sang, head of the FSC's financial policy bureau. He cited an improvement in the "quality" of household debt and the soundness of the country's lenders.

Nonetheless, he added, there remain "vulnerabilities," especially with regard to sole proprietors and low-income households with excessive mortgages amid looming interest rate hikes and a prolonged economic slump.

Doh Kyu-sang, head of the financial policy bureau at the Financial Services Commission, holds a press briefing in this file photo. (Yonhap)

The debt service ratio (DSR) of self-employed people here jumped 4.9 percentage points on-year to 35.5 percent in 2016.

"Their troubles will likely grow due to sluggish domestic spending. And there are various types of businesses they own and debt woes," Doh added. "Thus, efforts for tailored (risk) management are necessary."

The FSC will provide policy support for them and also push for a longer-term strategy to deal with the household debt problem itself.

In this undated file photo, customers discuss mortgage loans with bank officials. (Yonhap)

The commission plans to unveil a road map by March for upgrading the system to screen borrowing qualifications.

Although the current restrictions on the debt-to-income (DTI) and loan-to-value (LTV) ratios will be maintained, the FSC will seek ways to evaluate borrowers' income and debt payment ability more accurately and rationally.

It will also campaign to spread the use of the DSR as an alternative yardstick.

The DSR, published by the Bank for International Settlements (BIS), reflects the share of income used to service debt. It's regarded as a reliable early warning indicator for systemic banking crises.

Concern has grown about a possible negative impact on the gross domestic product growth from massive household debt.

The Bank of Korea said it may hurt domestic consumption, revising down its forecast for South Korea's economic growth for 2017 to 2.5 percent from 2.8 percent last week.

"Growth in private spending is projected to slow due to an insufficient improvement in income conditions and more burden for debt payment," the central bank said.

The Hyundai Research Institute also said the household debt problem is estimated to lower consumption growth by 0.63 percentage point this year.


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