SEOUL, Mar. 21 (Korea Bizwire) — A growing number of South Korean households had difficulties paying off their debt with their income last year, data showed Sunday, raising concerns over their financial stability and shrinking domestic consumption.
“Marginal households” whose debt-to-disposable income ratio is over 40 percent tallied at 1.58 million, accounting for 14.8 percent of the total, the Hyundai Research Institute said. The figure was up from the 12.3 percent in 2012.
The debt service ratio (DSR) measures the proportion of disposable income that households must devote to servicing their debt obligations. A DSR over 40 percent is often used as a threshold by financial institutions to determine whether or not to extend credit to borrowers.
The DSR ratio of heavily indebted households was 104.7 percent in 2015, which means they have to borrow more to pay their existing debt.
Four out of 10 in the group said they are incapable of repaying their debt either within the borrowing period or not at all.
Among the households that reached their debt limit, 62.3 percent plan to take additional loans within a year for living expenses, while 17.7 percent said they will borrow more to repay their debt.
Those aged over 60, the self-employed and lower-income families showed a higher ratio of heavily indebtedness.’
Experts say the rising household debt is wreaking havoc on the Korean economy as borrowing by the heavily indebted households account for about 30 percent of the nation’s private debt market.
“The high probability of the delinquency rate could destabilize the financial market,” said Lee Jun-hyeop, a researcher at Hyundai Research Institute. “Financial institutions should support lower-income families to raise their debt-service capability and provide financial consulting to medium-income households as well.”
The shrinking disposable income is another negative factor for Asia’s fourth-largest economy already suffering from stagnant consumption as most indebted households plan to reduce consumption due to their increasing financial burden.