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More Korean households default on loans

Publication Date : 25-07-2012


The default rate for household loans from secondary lenders is increasing sharply, raising fears of a household debt crisis.

The proportion of borrowers from credit card companies who are at least 30 days behind in payments jumped from 4.5 per cent in January last year to 5.6 per cent in May this year.

Loan default rates for capital services firms rose from 6.1 per cent to 8.2 per cent, and mutual savings banks from 12.2 per cent to 14.9 per cent in the same period.

Meanwhile, banks’ average loan default rate gained a mere 0.1 percentage point to 2.3 per cent.

Borrowing from secondary lenders has been on the rise as bank loans to households have come under stricter regulations since last year in a bid to curb snowballing household debt. Korea’s household credit stood at 911.4 trillion won (US$793.2 billion) as of end-March.

While household loans from banks gained only 800 billion won from last December to 456.7 trillion won in May, household borrowing from secondary lenders jumped 2.3 trillion won to 186 trillion won.

Most of the people who borrow from secondary lenders are low-income earners who are denied loans from banks due to low credit or have reached their loan limits at banks.

A government survey of household finances last year showed that the average credit loan taken out by the bottom 20 per cent of households in net assets surged 24.5 per cent from 2010 to 10.98 million won, greater than the top 20 per cent’s average credit loan of 7.74 million won.

The average credit card debt for the bottom 20 per cent amounted to 1.19 million won, compared to 170,000 won for the top 20 per cent.

The bottom 20 per cent were spending about a quarter of their income to pay off the debts.

Park Deok-bae, a researcher at Hyundai Research Institute, said there is a need to take policy measures such as cutting the loan interest rates or adjusting repayment periods to address the growing delinquency of the financially vulnerable.


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