SEOUL, Nov. 24 (Korea Bizwire) – South Korea said Thursday it will soon introduce a new early warning system for potential risks from the nation’s massive household debt, especially as interest rates here may soon start an upward trend.
Household debt totaled 1,295.8 trillion won (US$1.1 trillion) as of the end of September, up 3 percent from three months earlier, according to the Bank of Korea.
Taking into account a 7.5-trillion-won increase in household borrowing from local banks in October, market watchers say household credit is estimated to have already exceeded 1,300 trillion won.
Financial regulators, however, stressed that the growth of household debt has slowed notably since the government’s announcement on Aug. 25 of policy measures to tighten the screening of group mortgage loans for new apartment purchases and lending by the non-bank financial sector.
Banks’ lending increased only 13.5 trillion won in September and October, down 10.5 percent from 15.1 trillion won recorded during the same months in 2015, the Financial Services Commission (FSC) said.
“The growth rate of household debt seems to have peaked. It is seen as having entered the declining phase,” an FSC official said. “We will continue follow-up measures to the Aug. 25 announcement.”
A dilemma is interest rate hikes. Around 70 percent of all household debt has floating interest rates.
The U.S. is widely expected to raise its key rate in December. Many also predict that the incoming Donald Trump administration will favor aggressive fiscal spending, leading to inflation, called “Trumplation” by media.
If the interest rate goes up one percentage point, the debt payment burden will reportedly climb about 11 trillion won per year.
In a pre-emptive step, the FSC said it will introduce the debt service ratio (DSR) in early December, which is regarded as a reliable early warning indicator for systemic banking crises.
The DSR, published by the Bank for International Settlements (BIS), reflects the share of income used to service debt.
“We will also conduct a stress test (on the lending industry) based on various scenarios,” the FSC said.
It also plans to revise rules on non-bank financial institutions’ lending to tighten the screening of loan applicants and phase out grace periods for debt payment.