[Bank of Korea Financial Stability Report] "Rising Interest Rates Increase Delinquency Rates on Vulnerable Household Loans"

[Asia Economy Reporter Kim Eun-byeol] As the world gradually recovers from the COVID-19 pandemic, interest rates in major advanced countries are rising, and if domestic and international shocks occur, loan delinquencies are likely to increase, especially among vulnerable borrowers.

According to the "2021 First Half Financial Stability Report" released by the Bank of Korea on the 22nd, the proportion of vulnerable borrowers in household loans was 6.4%, and their share of outstanding debt was 5.3%. Vulnerable borrowers are defined as multiple debtors (borrowing from three or more financial institutions) who are either low-income (bottom 30% income) or low-credit (credit score of 664 or below).

The proportion of borrowers with a DSR (Debt Service Ratio) exceeding 70% and their outstanding debt has slightly decreased since 2019, standing at 13.5% and 39.7%, respectively, as of the end of last year.

The Bank of Korea stated, "The delinquency rate of vulnerable sectors is significantly affected by market interest rate fluctuations compared to non-vulnerable sectors," and added, "The sharp increase in delinquency rates among vulnerable borrowers during periods of rising interest rates is presumed to be due to their initially high debt repayment burden and the rapid increase in interest expenses when rates rise." Historical data shows that during the interest rate hike period (from the end of Q4 2016 to Q1 2019), the delinquency rate of vulnerable borrowers increased by 2.0 percentage points, whereas the delinquency rate of non-vulnerable borrowers remained unchanged.

The group with high DSR levels also saw a 0.3 percentage point increase in delinquency rates during the interest rate hike period.

The Bank of Korea explained, "In the event of shocks such as rising interest rates in major advanced countries, loan delinquencies are likely to increase mainly among vulnerable borrowers," adding, "Loans to vulnerable borrowers tend to have a high proportion of credit loans, which are sensitive to market interest rate fluctuations, and many low-credit borrowers, resulting in a relatively large increase in their debt repayment burden."

It also pointed out concerns that credit risk could further increase if the improvement in income conditions for vulnerable sectors is delayed due to the expiration of various financial support measures and uneven economic recovery.

The Bank of Korea emphasized, "Financial institutions need to establish and implement lending strategies to prevent a rapid increase in delinquencies among vulnerable households when domestic and international conditions change," and noted, "It is important to be aware that vulnerable sectors have higher delinquency entry and persistence rates compared to non-vulnerable sectors."

In particular, for commercial real estate loans with a high proportion of high-DSR borrowers, the LTV (Loan-to-Value) ratio is high, and loan soundness can be sensitively affected by changes in real economic conditions.

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