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Rate hike likely to increase vulnerable households' debt repayment burden: BOK

All News 11:49 June 22, 2017

SEOUL, June 22 (Yonhap) -- An interest rate hike in South Korea could increase debt repayment burdens of vulnerable households as borrowing rose to record levels in the first quarter, the central bank said Thursday.

South Korea's household debt came to 1,359.7 trillion won (US$1.2 trillion) as of end-March, a dramatic increase from 665 trillion won at the end of 2007, the Bank of Korea said in a report submitted to the parliament.

It said the household debt-to-disposable income ratio came to 153.3 percent, up 8.6 percentage points from the previous year.

"Households' debt repayment capacities have on the whole remained favorable," the report said. "In a situation of sluggish improvements in income conditions, however, if market interest rates rise in the future, then debt repayment burdens can increase, mainly among vulnerable groups."

Last week, the U.S. Federal Reserve raised key interest rates by 0.25 percentage point, making its target range for the federal funds rate 1 to 1.25 percent, a level that's on par with South Korea's.

It was the second time the Fed has raised rates this year after the first hike in March. The Fed also added it plans to reduce its securities holdings, a move that could spur rates to rise further.

Analysts said the BOK could face growing pressure to raise its benchmark interest rate, which could increase borrowers' financial burden.

Last week, BOK Gov. Lee Ju-yeol said the central bank may take a monetary tightening approach if the economy shows signs of a robust recovery, a signal that the central bank may consider a rate rise over the long haul.

South Korea's household debt is mainly caused by people borrowing money from banks and other financial firms to buy homes and invest in real estate and other businesses amid eased regulations and low interest rates.

Still, the BOK said the qualitative structure of household debt has improved, with the proportions of loans with fixed rates and amortizing loans having risen steadily, to stand at 43 percent and 45.1 percent at end-2016, respectively.

Last week, the South Korean government announced that it will tighten lending rules on homes in some designated speculative areas to curb real estate speculation.

The BOK said the housing market has generally remained stable, but the uptrend in prices has accelerated, led especially by rising prices of old apartments that have been reconstructed in the Seoul metropolitan area.

Under the measures to be put into effect July 3, the loan-to-value ratio in Seoul, Gyeonggi Province, some areas in Busan and the administrative capital of Sejong will be lowered to 60 percent from 70 percent.

The debt-to-income ratio in the areas will be marked down to 50 percent from 60 percent.

Separately, the BOK said the South Korean financial system's resilience -- its capacity to withstand domestic and external shocks -- has remained solid.

It said capital adequacy ratios at both banks and nonbanking financial institutions have greatly exceeded the regulatory levels.

"From the standpoint of the external payment capacity as well, net external assets and foreign exchange reserves are continuing their trends of increase, and the short-term external debt ratio has also maintained a low level," the report said.

The Financial Stability Index, which shows the overall condition of the financial system, stood at 2.8 in May of 2017, considerably below the warning stage level of 8.0, according to the BOK.

entropy@yna.co.kr
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