Household Debt 'Warning Light'... Shock from Interest Rate Hike Approaching (Comprehensive)

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
Bank Loan Growth Rate This Year Expected at 6%, Half of Last Year's Level

Household Loans Surpass 1,000 Trillion Won for the First Time Last Month... Debt Snowballing Due to Debt Investment and Yeongkkeul

[Asia Economy Reporters Kwangho Lee, Sunmi Park] The outstanding balance of household loans at banks exceeded 1,000 trillion won for the first time in history, raising warning signs about household debt. Although the rapidly increasing unsecured loans have stabilized, the demand for housing-related loans grew due to the moving season and soaring jeonse prices, resulting in an increase of about 7 trillion won last month.

The problem is that bank loan interest rates are also rising alongside the recent increase in U.S. Treasury yields. There are concerns that if interest rates rise in earnest, the interest burden on households that have invested with borrowed money (debt investment) or pulled together all their resources (Yeongkkeul) will sharply increase. Additionally, with the government continuing to tighten loan regulations, it will become even more difficult for households to obtain loans, and banks will face the challenge of continuously improving the quality of their loan portfolios going forward.

According to financial authorities and the industry on the 11th, as of the end of February, the outstanding household loans at banks reached 1,003.1 trillion won, an increase of 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).

The increase was largely influenced by rising jeonse loan demand due to moving season ahead of the new school term. Jeonse loans last month increased by 3.4 trillion won, up 1 trillion won from 2.4 trillion won in the previous month. The total household loan increase across the financial sector, including banks, was 9.5 trillion won in February. Although this was a slowdown compared to 10.4 trillion won in the previous month, it was larger than the 8.8 trillion won recorded in December last year. The household loan growth rate in February was 8.5%, compared to 5.3% in 2019 and 5.0% in 2020.

Signs of Market Interest Rate Rise "Interest Bomb Could Drop"

The problem is that market interest rates, which had been at historic lows, are showing signs of a full-fledged rise amid the record-high household debt situation. 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 affect 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 interest rates rise, the interest burden inevitably increases. With the government announcing plans to issue deficit bonds worth 9.9 trillion won to fund the 4th round of disaster relief payments, the outlook is that interest rates will rise further.

Financial authorities are expected to announce unprecedented household debt management measures this month, which could make funding even more difficult for households with high interest burdens and low-income earners.

In the market, there are concerns that once the financial authorities announce household debt management measures, commercial banks may need to make significant changes to their lending strategies as it could also impact their profit structures.

The Korea Institute of Finance estimates that the loan growth rate in the banking sector this year will be 6%, about half of last year's rate. In particular, it expects a significant reduction in profit generation from unsecured loans in household lending.

Authorities Tighten Loans... Banks Must Improve Portfolio

Despite the economic downturn caused by COVID-19, domestic bank loans increased at a rate exceeding 10% last year. This far surpasses the 6.2% loan growth rate in 2019 and is the highest since the 14.4% recorded during the 2008 financial crisis. Considering that rapid loan growth in the past was followed by deterioration in asset quality and that the repayment ability of corporations and individual business owners has steadily worsened since 2016, the rapid loan growth last year is inevitably negative for the medium- to short-term asset quality of domestic banks.

The net interest margin (NIM), an indicator of bank profitability, also fell to a record low of 1.38% in the fourth quarter of last year.

A representative from the Korea Institute of Finance pointed out, “Banks need to prepare for the possibility of asset quality deterioration due to the rapid loan expansion last year and improve the quality of their loan portfolios.”

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