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Growing second-tier loans mount household risks

An increasing number of households in Korea are burdened with high-interest loans from secondary financial firms, central bank data showed Sunday.

As a result, concerns are escalating over the possibility that the recent surge in the second-tier loans may increase the number of loan delinquents in the coming years and dent the economy.

According to the Bank of Korea, the credit based-loans from the secondary sector -- such as mutual savings banks and capital services firms -- increased by about 5 trillion won ($4.2 billion) in the second quarter of the year.

Based on yearly second-quarter comparisons, the growth marked an all-time high since the BOK started officially publicizing the relevant statistics.

In addition, the collective outstanding debt owed to the secondary sector came to 138 trillion won as of June 30, up from 133 trillion won at the end of March. It is equivalent to 12 percent of the nation’s total household debt totaling 1.13 quadrillion won.

Most housing-collateralized loans issued by first-tier banks charge rates of less than 3.5 percent amid the BOK’s setting record-low benchmark rate of 1.5 percent.

In contrast, the rates on the second-tier loans approximately range between 12 percent and 29 percent generally, as they are mostly based on the credit standing of borrowers, whose income level is relatively low or who have no assets.

Research analysts say that low-income earners -- and some from the middle-income bracket -- have no choice but to resort to the secondary loans as the first-tier commercial banks usually reject lending to citizens with low credit scores or with no collateral.

When the BOK shifts its stance to raise the benchmark rate amid the U.S. Federal Reserve’s move to hike the rate, a large portion of the low-income borrowers will face a heavier burden of higher interest and redemption as many of the secondary lenders charge floating rates, they warn.

“Housing-collateralized loans account for less than 50 percent of the total household debt. Credit loans without collateral could be a detonator (which would damage the economy and many households from possible insolvency of the loans),” said a researcher from Hana Institute of Finance.

The BOK’s two rate cuts in the first half of the year have contributed to the expansion of housing loans. The monetary policymakers eased the benchmark rate from 2 percent per annum to 1.75 percent in March, and to 1.5 percent in June in their reported effort to spur the economy amid sagging exports and private consumption.

A research fellow from LG Economic Research Institute has downplayed the positive effects of the rate cuts.

He predicted that the effects would be restricted in terms of vitalizing the economy “due to the structurally weak consumer sentiment caused by the record household debt.”

The policy options for the BOK seem to have decreased. The bank has been pressured to carry out its monthly rate-setting after monitoring the Fed’s decision on Sept. 16-17.

Foreigners could scale back financial investment in South Korea when the gap between the Korean and U.S. rates narrows further as local economists worry about a massive capital flight.

By Kim Yon-se (