South Korea takes steps to better manage growing household debt

[SEOUL] South Korea unveiled on Wednesday a modest set of measures aimed at mitigating risks from the heavy and growing household debt burden, but promised to continue with broad policies designed to support economic growth.

The government will aim to lift the ratio of amortised loans to 45 per cent of the total bank lending to households by the end of 2017, from an estimated 33 per cent at the end of June this year, the Financial Service Commission said in a statement.

That moves the target up from 40 per cent set previously for the end of 2017, the final full year before President Park Geun-hye's five-year term ends in early 2018.

But the government has effectively given up on its own goal of keeping growth in household debt to below the pace of increase for disposable income, as it's been hamstrung by a fragile recovery in Asia's fourth-largest economy. "The goal has not been discarded but it will take time for efforts to strengthen the borrowers' debt repayment ability to take effect," Sohn Byung-doo, head of the commission's financial policy bureau, told an embargoed briefing.

South Korea's heavy household debt has been cited as a major weak spot in the country's financial system as shocks such as a sudden spike in interest rates or a sharp slowing in the economy could cause a series of debt defaults by households.

In February last year, President Park said she aimed to cut the household debt to disposable income ratio to 155 percent by the end of 2017 from 160 percent at the end of 2013.

But months later, the government eased mortgage restrictions and the central bank cut interest rates, and the ratio jumped to 164 per cent at the end of last year. In comparison, the ratio reached 140 per cent in the United States in 2007, just before that country's housing bubble burst.

Government sources have told Reuters recently it was neither possible nor desirable for the government to try to achieve the goal of bringing down the ratio swiftly, given the weak economic recovery.

Apart from pushing up the amortised loan target, the commission also said the government would strengthen the funding capability of the state-run Korea Housing Finance Corporation to help local lenders provide money to borrowers.

The company's authorised capital would be more than doubled to 5 trillion won (S$5.9 billion) from 2 trillion won now and it will be allowed to sell up to US$500 million of bonds abroad based on loans that it purchases from local lenders.

The commission also said it would require lenders to strengthen their screening practice on loan applications such as securing more documentations on the applicant's income and repayment ability.

REUTERS