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S. Korea's household debts keep record-breaking trend on balloon effect

Xinhua, November 24, 2016 Adjust font size:

Household debts in South Korea kept a record-breaking trend on the back of the so-called balloon effect, under which borrowers move to higher-rate loans in non-bank institutions from bank loans demanding tighter standards for lending, central bank data showed on Thursday.

Household credit, which includes loans from banks and non-bank institutions as well as purchase on credit, reached 1,295.8 trillion won (1.1 trillion U.S. dollars) as of the end of September, up 38.2 trillion won from three months earlier, according to the Bank of Korea (BOK).

It was the largest quarterly increase since the bank began to compile the data in 2002.

The third-quarter increase of 38.2 trillion won is faster than a 33.9-trillion-won expansion in the previous quarter. From a year ago, the household credit rose 130.9 trillion won, marking the fastest-ever yearly growth.

Debts owed by households to non-bank lenders, including savings banks, credit unions and community cooperatives, reached 277.7 trillion won as of end-September, up 11.1 trillion won from three months ago.

It was the biggest quarterly growth in loans from non-bank lenders, caused by households which moved to non-bank institutions demanding higher lending rates but applying loosened standards for borrowers.

Banks tightened standards for lending in accordance with the government's guideline, triggering the so-called balloon effect. It would raise debt-servicing burden especially among low-credit households if market rates rise down the road.

Market rates recently began reflecting an expected rate increase in the United States. The U.S. Federal Reserve is widely forecast to hike interest rates in December.

Bank loans to households expanded 17.2 trillion won from three months earlier to reach 603.9 trillion won as of end-September. Among them, home-backed debts jumped 13.4 trillion won to 433.6 trillion won.

The BOK cut its benchmark interest rate from 3.25 percent in July 2014 to an all-time low of 1.25 percent in June this year, while the government eased regulations on mortgage financing.

Households rushed to purchase new apartments with borrowed money, boosting worries about the bubble forming in the real estate market. Endit