Warning Lights On Household Finances... Rising Interest Rates Pose Major Economic Burden

Bank Household Loans Exceed 1,000 Trillion Won... Financial Sector Total Loans Surge by 9.5 Trillion Won
Government Bond Yields Fluctuate from Long-Term to Short-Term... Interest Burden Inevitable Increase

[Asia Economy Reporter Kwangho Lee] Household loan balances at banks have surpassed 1,000 trillion won for the first time ever, raising warning signs about household debt. Although the surge in unsecured loans has calmed, demand for housing-related loans increased due to the moving season and soaring jeonse prices, resulting in an increase of about 7 trillion won last month.

According to financial authorities and the industry on the 11th, as of the end of February, the household loan balance at banks stood at 1,003.1 trillion won, up 6.7 trillion won from the previous month (996.4 trillion won), entering the 1,000 trillion won range. The increase in February was the second largest since statistics began in 2004, following February last year (9.3 trillion won).

Last month, household loans at banks were largely composed of housing mortgage loans such as jeonse loans. Jeonse loans increased by 3.4 trillion won, pushing housing mortgage loans up by 6.4 trillion won. Jeonse deposit loans rose by 1 trillion won again in one month, from 2.4 trillion won in January.

The total increase in household loans across the entire financial sector, including banks, was 9.5 trillion won in February. Of this, loans from the secondary financial sector amounted to 2.8 trillion won. Although the overall household loan growth slowed compared to the previous month (10.4 trillion won), it was larger than in December last year (8.8 trillion won). The household loan growth rate in February was 8.5%, compared to 5.3% in 2019 and 5.0% in 2020.

With household debt reaching record highs and signs of rising interest rates, concerns are mounting.

The 3-year government bond yield, which was 1.02% at the end of February, closed at 1.206% on the 9th, rising by 18.6 basis points. Short-term interest rates influence bank bonds and the COFIX (Cost of Funds Index) rates announced by the Korea Federation of Banks, which serve as benchmarks for bank loans. In other words, when short-term rates rise, interest burdens increase. Meanwhile, the government’s announcement of issuing 9.9 trillion won in deficit bonds to fund the 4th round of disaster relief payments is expected to further drive interest rate increases.

Although the household loan delinquency rate remains stable, recent upward trends mean it cannot be considered safe. At the end of January, the household loan delinquency rate was 0.21%, up 0.01 percentage points from the end of the previous month (0.20%). The delinquency rate for housing mortgage loans (0.14%) remained similar to the previous month. The delinquency rate for household loans excluding housing mortgages (0.37%) rose by 0.04 percentage points from the previous month (0.34%).

A Financial Services Commission official stated, "Signs of rising interest rates, such as expected inflation and government bond yields, are appearing, so we will closely monitor each sector and prepare to respond promptly if necessary." He added, "We will manage household debt so that it does not become a burden on our economy through household debt management measures to be announced this month."

The core of the household debt management plan announced by the Financial Services Commission is to apply the Debt Service Ratio (DSR), which considers the borrower's total debt and income to lend according to repayment ability, to all loans. The DSR standard is expected to be set around 40%. This means that the total amount of principal and interest to be repaid annually should not exceed 40% of annual income. However, the Financial Services Commission plans not to retroactively apply the new system to loans taken before the regulation is implemented.

This content was produced with the assistance of AI translation services.