Roundup: S. Korea's non-bank household debts double amid rising debt burden

Non-bank household debts in South Korea almost doubled in the first half of this year due to tightened standard for bank loans, while marginal households burdened with excessive debts topped 1.3 million as debts grew at a faster pace than income, central bank reports showed on Thursday.

As of May 20, household debts offered by non-bank institutions reached 407.4 trillion won (353.62 billion U.S. dollars), up 15.9 trillion won compared with the end of last year, according to a Bank of Korea (BOK) report submitted to the National Assembly.

The first-half increase of 15.9 trillion won almost doubled a growth of 8.8 trillion won tallied in the first half of 2015. Among the total, mortgage loans amounted to 147.6 trillion won as of May 20, up 7.2 trillion won from six months earlier.

Non-bank institutions refer to mutual savings banks, insurers, village-level banking institutions and credit unions, which provide loans with higher lending rates than bank loans for low-credit borrowers.

As banks tightened standard for loans, low-credit households flocked to non-bank institutions for high-rate loans, increasing the debt-repaying burden.

The BOK cut its benchmark interest rate by 25 basis points to an all-time low of 1.25 percent earlier this month, boosting worries further about the already massive household debts that have kept a record-breaking trend.

The prolonged low rate restricted debt-servicing burden for households, but if interest rates are raised or household income reduces on unexpected shocks, households who fail to pay back loans could rise rapidly.

Banks' household debts stood at 660.9 trillion won as of end-May, up 21.8 trillion won from the end of last year amid the record-low interest rate.

The 21.8 trillion-won increase was lower than a growth of 33.6 trillion won in the first half of last year, indicating loan demand moving from banks to non-bank institutions.

The number of so-called marginal households burdened with excessive debts reached 1.34 million as of end-March, or 12.5 percent of total households with debts, the BOK said in a separate report on financial stability. It was up 40,000 from a year ago.

The rise came as debts increased at a faster pace than household income, driving households to borrow more money from high-rate loan lenders.

Financial debts owed by marginal households accounted for 29.1 percent of the total financial debts as of end-March, up 0.5 percentage points from a year ago.

Marginal households refer to those who have more financial debts than assets and keep a ratio of debt repayment to disposable income at over 40 percent.

The ratio of household debts to disposable income reached 145.6 percent as of end-March, up 4.9 percentage points from six months earlier. It far surpassed an average increase of 3.1 percentage points tallied for 10 years from 2005.

The percentage of financial debts to financial assets by households averaged 44.8 percent as of end-2015, up 0.8 percentage points from six months ago.

The rate of household debts to nominal GDP touched a record high of 91.3 percent as of end-June last year, boosting worries about massive household debts.

Meanwhile, banks' bad debt ratio rose to the highest in five years amid the protracted economic slump and the ongoing corporate restructuring in trouble shipbuilders and shipping firms.

The percentage of sub-standard loans, overdue more than three months, stood at 2.6 percent of the total as of end-March. It was the highest since March 2011 when the rate recorded 2.8 percent.

The bad debt ratio in the transport equipment industry, including shipbuilders, topped 10 percent at 11.1 percent as of end-March, with the figure for primary metal and construction sectors posting 4.8 percent and 4.3 percent respectively.

Corporate loans by banks totaled 1,061 trillion won as of end-March, accounting for 63.4 percent of the combined bank loans. Endit