[Household Debt Time Bomb Multiple Debtors] Most High-Interest Rate Refinancing... "Financial Crisis-Level Risk"

Multiple Debtors Borrow 122.19 Million KRW Each... 13 Million KRW Increase in 4 Years
Increase in Interest Payment Deferrals and Installment Requests Amid Rising Self-Employed Closures and Personal Bankruptcies
30% of Household Loans Are Multiple Debtors, Experts Urge Proactive Management of Vulnerable Borrowers

[Asia Economy Reporters Kwangho Lee, Kiho Sung, Seungseop Song] A red warning light has been triggered on multiple debtors within household debt. The proportion of loan balances held by multiple debtors and the average loan amount per person have increased within total household loans, leading to a deterioration in the quality of debt. Experts express concern that once the government's COVID-19 loan maturity extensions and interest payment deferrals end and full-scale interest rate hikes occur, multiple debtors could become a trigger for household debt defaults. There is a growing call for financial authorities to classify multiple debtors by risk level and actively manage and supervise them.

Deterioration in Debt Quality... A Minefield Everywhere

According to the ‘2017?2020 Multiple Debtor Statistics’ submitted by the Bank of Korea to Yoon Chang-hyun, a member of the National Assembly’s Political Affairs Committee from the People Power Party, the average loan amount per multiple debtor last year was 122.19 million KRW, an increase of 13.61 million KRW from 2017 (108.58 million KRW). The amount has been rising annually: 108.58 million KRW in 2017, 110.81 million KRW in 2018, and 113.50 million KRW in 2019. During the same period, multiple debtors accounted for 31.8% of total household loans (1,630.2 trillion KRW).

The increase in multiple debtor loan amounts and borrowers is due to a surge in self-employed individuals who suffered from COVID-19 impacts and had to close businesses or faced difficulties in operations, as well as young people unable to find employment and the unemployed, leading to situations where debts are repaid with more debt. In fact, the number of personal workouts (for debtors overdue by 90 days or more) in the fourth quarter of last year was 23,912, up by 1,889 from 22,023 a year earlier. The total number of applicants last year was 99,486, a 6% increase from 93,291 the previous year. The number of people who applied for expedited debt adjustment at the Credit Recovery Committee last year was 2,098, up by 1,166 from 932 a year earlier. Expedited debt adjustment is a process that adjusts debts for multiple debtors who have no overdue payments or overdue days less than 30. Borrowers who have borrowed from multiple financial institutions but failed to repay on time and requested interest payment deferrals or installment repayments have rapidly increased.

Self-employed business closures have also surged. Although their business scale is small and financial debt size is not large, their debt-to-income ratio is very high. According to the National Tax Service’s ‘National Tax Statistics,’ 852,572 individual business owners closed their businesses in 2019, an increase of 21,688 from 830,884 the previous year. Among all individual business closures, the highest proportion by business type was service industry at 21.10% (179,906), followed by retail at 20.25% (172,645), and restaurants at 18.48% (157,595). Considering that 175,627 businesses opened restaurants, it implies that for every new restaurant opened, one existing restaurant closed. Particularly, retail and restaurant industries are sectors where livelihood-type households are concentrated among the self-employed. Many are pushed to the brink. The Supreme Court reported that the number of personal bankruptcy filings last year was 50,379, an increase of 4,737 from 45,642 the previous year, the largest in the past five years. Bankruptcy filings surged sharply after June, following the first major COVID-19 wave.

Moreover, the significant increase in multiple debtors among those aged 30 and under and high-income groups suggests that the debt-fueled investment (debt investment) and “Yeongkkeul” (pulling together all resources) craze are key factors. According to the Bank of Korea, household credit balances reached a record high of 1,726.1 trillion KRW at the end of last year. Household credit includes household loans from banks, insurance companies, securities firms, savings banks, and sales credit such as credit card installment payments. The Bank of Korea analyzed that borrowing was sourced extensively to purchase stocks and real estate. If stock and real estate prices fall, it is highly likely to lead directly to loan defaults.

Trigger for Defaults When Interest Rates Rise... Need for Management and Supervision

Experts point out that if interest rates rise significantly, the default problem among multiple debtors and low-income groups could become a trigger for household debt crises. In particular, since multiple debtors account for 30% of household loans, there are concerns that they could become a hidden threat that shocks the real economy.

Professor Oh Jung-geun of Konkuk University’s Department of Economics warned, “Multiple debtors usually borrow first from commercial banks and then refinance through secondary financial institutions with higher interest rates, so they will be hit immediately when interest rates rise,” adding, “The crisis of ‘multiple default borrowers’ could escalate into a financial crisis.” Professor Kim Sang-bong of Hansung University’s Department of Economics emphasized, “Multiple debtors who borrow for living expenses are more dangerous because they have no assets to liquidate,” and cautioned, “We should not be complacent just because the proportion of high-income borrowers has increased.” According to Professor Kim, the rapid increase in loan amounts among multiple debtors is a “clear trigger for an economic crisis.”

To minimize the risk of defaults centered on multiple debtors, there are calls to distinguish vulnerable borrowers and manage them proactively. Professor Kim So-young of Seoul National University’s Department of Economics said, “There seems to be no short-term solution to the accumulated debts of multiple debtors due to COVID-19,” advising, “In the long term, if borrowers have the capacity to recover and repay debts, additional credit supply should be provided; if principal repayment is uncertain, management measures are necessary.” Professor Oh also expressed concern, saying, “Among borrowers whose loan maturities were extended by financial authorities, some cannot even pay interest, and these people will find it difficult to repay even after COVID-19 ends,” adding, “Since they are classified as performing loans, defaults are hidden, and banks delay appropriate responses.” He further stated, “It is time for the government and financial authorities to take an active stance on debt adjustment.”

There are also opinions that it is still too early to discuss a crisis. Senior Researcher Lim Hyung-seok of the Korea Institute of Finance argued, “Banks lent money judging that borrowers had good credit in a liquidity-rich environment,” and said, “Although U.S. bond yields are rising, for multiple debtors, borrowing costs are more important, so it is premature to talk about defaults.”

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