Seoul strives to ease household debt burden

By Korea Herald

Financial authorities to expand micro-loans on low interest rates

  • Published : Feb 27, 2014 - 21:36
  • Updated : Feb 28, 2014 - 11:46
Apartment complexes stand in Seoul (Bloomberg)
Top economic policymakers warned Thursday against mounting household debt, which surpassed 1,000 trillion won ($936 billion) at the end of 2013.

They reiterated that economic revitalization would be infeasible without resolving consumer debt levels.

“Household debt problems could be a barrier for the incumbent administration-led project for economic renovation,” Deputy Prime Minister and Finance Minister Hyun Oh-seok said during a joint news briefing with financial regulators.

Hyun said the government will lower the debt-to-income ratio in the household sector by 5 percentage points by late 2017 (from the current level of more than 165 percent).

Korea’s household debt-to-income ratio was 163.8 percent at the end of 2012, far exceeding the average of 134.8 percent held by 34 members of the Organization for Economic Cooperation and Development.

The figure is estimated to have remained near the 165 mark in 2013, according to the Financial Services Commission.

“Should the nation fail to resolve the household debt issue, it would be difficult to revitalize domestic demand,” FSC chairman Shin Je-yoon said.

Shin said the FSC would push local banks to increase the portion of loans with fixed interest rates and induce households to amortize the principal and interest.

As a key measure, regulators have decided to expand state-led micro-loans for borrowers suffering from the heavy burden of high loan rates, charged by the secondary banking sector or private moneylenders.

The FSC also plans to raise the portion of both fixed-rate loans and principal-interest repayments to 40 percent by end-2017.

Last year, bank loans with fixed interest rates accounted for 15.9 percent of the total mortgage lending. The bulk of banks’ mortgage loans are extended with floating lending rates, making households more exposed to higher debt-servicing burdens when market rates rise.

The weight of principal-interest repayment accounted for 18.7 percent as of end-December, as many households only repay interest on their mortgage loans without paying back the principal for an extended period.

Korea’s total consumer debt has increased annually by double-digits over the past decade, twice as fast as income.

According to Bank of Korea data, households saw their combined debt snowball 11.7 percent a year between 2000 and 2013. In contrast, their annual income growth stood at 5.7 percent.

Meanwhile, the Ministry of Land, Infrastructure and Transport said a day earlier that it would offer tax benefits to households with “weolse” contracts, under which tenants pay monthly rent.

Under the economy-related ministries’ joint effort to relieve low and mid-income households of financial burdens, the Land Ministry ― in coordination with the tax authority ― will expand the yearly tax deduction for weolse tenants.

Tenants whose annual income is below 70 million won will get tax deductions of up to 10 percent of their monthly rent payments.

By Kim Yon-se and news reports (