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South Korean household debt burden grows, no default risk seen for now

[SEOUL] The soundness of South Korean household finances worsened slightly in the first half of the year as debt grew faster than disposable income, the Bank of Korea said on Thursday.

In a twice-yearly report on financial stability, the Bank of Korea said although household debt delinquency rates were improving, increased borrowing because of low interest rates was adding pressure on households compared to the second half of last year.

Previous central bank data has shown household credit stood at 1,223.7 trillion won (S$1.43 trillion) as of end-March, up 11.4 per cent from a year earlier and extending a climb that began in the third quarter of 2014.

"As the period of low interest rates becomes prolonged, there is a chance household debt will grow further. Efforts to boost household income and improve debt structure should be redoubled," the report said. "There is also a need to be wary of some low-income households defaulting on their debt as borrowing grows."

The Bank of Korea said that despite the burgeoning debt, the chance of households defaulting on their borrowing en masse, was low, given that delinquency rates had fallen steadily since 2013.

The report added that even if interest rates were to increase by 100 basis points, any threat to the financial sector was "very low".

The Bank of Korea's monetary policy rate currently stands at a record low 1.25 per cent after its board lowered it on June 9. The bank will next review interest rates on July 14.

REUTERS