Korea needs to take pre-emptive actions against mounting household debt as the sluggish local property market and global economic downturn are contributing to a steady rise in loan delinquency rates, the head of the country’s financial watchdog said Wednesday.

“It’s imperative that we take pre-emptive countermeasures against the household debt problem to assure a soft landing as it poses a great risk to our growth,” Financial Supervisory Service Gov. Kwon Hyouk-se said during a seminar held in central Seoul.

According to FSS data, the combined amount of household debts excluding credit-based loans reached 857.8 trillion won ($755 billion) as of end-March this year, with a growth rate of 6.9 percent on-quarter, down from 8.0 percent in 2011.

Although the pace of household debt growth has fallen off due to stricter loan rules, potential defaulters with low credit ratings need to be monitored, he said.

“Recent debts were extended to more affluent borrowers ...which means there is less risk for default. But 6.6 million low-credit borrowers like small business owners are in the hazard zone,” Kwon said.

He advised financial executives to extend more fixed-rate loans with longer repayment periods, which can help prevent individual bankruptcies.

Late week, the FSS said it is pushing for a debt restructuring program for potential bank-loan defaulters in a bid to cushion the impact of a possible rise in household insolvencies. The pre-workout program calls for banks to cut interest rates for potential delinquents and allow them to repay the principal gradually over a long period of time.

The delinquency rate of mortgage loans extended by local banks rose at the fastest clip in five and a half years in May from the previous month, reaching 0.85 percent. (To better curb the household debts, Kwon mentioned the idea of increasing covered bond issuances, saying it will help borrowers secure long-term large sums at lower costs. Covered bonds refer to debt securities whose repayment is backed by high quality assets.

The FSS chief also emphasized transparent management in home-backed loans, adding that a more flexible system in rate adjustments and longer maturities is to be considered. 

(Yonhap News)