SEOUL, Oct. 8 (Korea Bizwire) — Nearly three out of every 100 households in South Korea may be unable to repay their debt in case of a sudden change to their income or the value of their assets, central bank data showed Tuesday.
According to the Bank of Korea (BOK), the number of households with “high risks” of default came to 298,000, or 2.7 percent of the total, as of the end of March 2018.
High-risk households refer to those with a debt service ratio (DSR) of more than 40 percent and a debt-to-asset (DTA) ratio of more than 100 percent, BOK said in its report submitted to the national assembly finance committee for parliamentary audit.
DSR and DTA measure a debt owner’s ability to repay his or her overall financial liabilities, including the principal of loans and lease payments.
In 2018, the number of high-risk households dropped slightly from 320,000 a year earlier, but outstanding loans extended to such households gained 4.3 percent to 58.1 trillion won (US$48.56 billion) over the cited period, accounting for 5.4 percent of all household debt.
The increase in high-risk debt comes amid a steady rise in overall household borrowing.
As of end-June, loans extended to local households reached a record high of 1,467.1 trillion won, while household credit, which includes credit card spending, also reached a new high of 1,556.1 trillion won.
The ratio of overall household debt to disposable income has also been on a steady rise since breaching the 150 percent mark in 2017, reaching 158 percent in 2018 and further climbing to 159.1 percent in the first six months of this year, according to the BOK.
The BOK said the household debt will not cause any serious problems for the local economy for now, but noted the amount may be nearing a threshold that could start negatively impacting local spending.
Global financial institutions advise countries to keep their overall household debt to around 60-85 percent of their gross domestic product (GDP).
“Considering such studies, it is possible that our household debt may be nearing the level that will have an adverse effect on consumption as it came to 94.6 percent of GDP in 2018,” the BOK said.
“However, considering the recent slowdown in the rise of household debt and the strong restorative power of financial institutes, the possibility of the household debt issue spreading to an overall financial risk remains slim,” it added.