South Korea's central bank on Thursday raised alert about escalating risks to the financial system, pointing out household and corporate loans that have continued to surge in the wake of a protracted economic slump.

As of end-September, outstanding loans of local households rose 7 percent on-year to 1,682.1 trillion won ($1.52 trillion). Their debt burden sharply increased with the households’ debt to disposable income ratio reaching 171.3 percent, up 10.7 percentage points from the previous year, the Bank of Korea said in its quarterly report.

Corporate loans also surged by 15.5 percent to reach 1,332.2 trillion won in the same period. 

Hit hard by COVID-19, local companies‘ fiscal soundness has worsened as their debt to equity ratio jumped by 2.6 percentage points on-year to 81.1 percent in the first half this year. 

“Financial instability may again present itself if the global economic recovery become stagnant, taking a toll on the country’s real economy. We have to keep vigilance against local companies’ business activities and their capacity to pay back their debt as some government‘s stimulus measures, including a moratorium on debt repayments, are set to expire in March next year,” the BOK said. 

The central bank also noted the overheated stock and real estate market may trigger market volatility and pose a challenge to the current financial stability. 

“Local stocks continued to remain bullish on major economies‘ quantitative easing policies and COVID-19 vaccine developments across the globe, while home prices grew at a faster pace in November, mainly due to a supply shortage of housing lease deals and the ongoing ultra-low rate environment, which has raised market expectations over housing price hikes,” it said. 

Despite looming risks over the prolonged coronavirus outbreak, the country’s financial market is in stable condition.

“The nation’s financial system has remained resilient as the virus-battered economy showed signs of recovery with the government taking active market stabilization measures,” it said. 

The country’s financial system index -- an overall measure of the financial market risk -- in November reached 7.7, sharply down from 22 reading in April, it added. The index is rated on a scale of zero to 100. The closer the figure is to 100, the greater the country’s financial instability.

In addition, domestic banks saw their financial health improve in the third quarter as they posted higher net profits and raised capital to counter the pandemic. The average capital adequacy ratio, or the proportion of a bank‘s capital to its risk-weighted assets, of 19 commercial and state-run banks, stood at 16.02 percent as of end-September, up 1.46 percentage points from the end of June, data showed.

By Choi Jae-hee (cjh@heraldcorp.com)