Interest Rate Hike, An Inevitable Reality... What About Vulnerable Groups Burdened with Debt?

Household Loans with Variable Interest Rates Reach 1,235.5 Trillion KRW in Q1

Interest Burden Increases by 12 Trillion KRW if Rates Rise by 1 Percentage Point

Additional Interest Burden on Low-Income Groups is 500 Billion KRW,

But Actual Burden is Larger Due to Many Multiple Debtors

Self-Employed Loans Near 850 Trillion KRW

Bank of Korea Maintains Rate Hikes... Separate Measures Needed for Vulnerable Groups

[Asia Economy, Reporter Kim Eunbyeol] The Bank of Korea has hinted at a possible interest rate hike as early as next month, or at the latest within this year, raising concerns that the already record-high debt burden could worsen. Even before COVID-19, the pace of debt increase was 2.5 times the income growth rate. In particular, there are concerns that the interest burden on low-income groups who took out loans to sustain their livelihoods and self-employed individuals whose incomes sharply declined due to the COVID-19 crisis could be substantial. Furthermore, with new COVID-19 cases hitting record highs daily, the difficulties faced by vulnerable groups could worsen. Strengthened social distancing measures may cause the economy to deteriorate again. While raising interest rates to cool overheated asset markets is necessary, experts advise that the impact on vulnerable groups should also be considered.

Interest Burden on Households Increases by 12 Trillion KRW if Rates Rise by 1 Percentage Point

It is natural that interest burdens increase when interest rates rise. According to the Bank of Korea on the 21st, as of the end of Q1, household debt stood at 1,765 trillion KRW. The proportion of variable-rate loans among mortgage and credit loans is about 60-70%, amounting to approximately 1,235.5 trillion KRW. Assuming that the entire portion of the interest rate hike is passed on to variable-rate loans, a 1 percentage point increase in interest rates would raise the interest burden by about 12 trillion KRW, which is 1% of 1,235 trillion KRW. If rates rise by 0.5 percentage points, the interest burden increases by 6 trillion KRW, and by about 3 trillion KRW if rates rise by 0.25 percentage points.

Most household debt in South Korea is concentrated among the middle class and above. The recent surge in household debt was triggered by the middle class and above leveraging themselves to invest in real estate or stocks. According to the Bank of Korea and Statistics Korea’s estimated changes in interest burden by household income quintile due to interest rate increases, when rates rise by 1 percentage point, the burden on the high-income 5th quintile increases by 5.3 trillion KRW, while the burden on the 1st quintile (lowest income) increases by only 500 billion KRW.

However, the debt situation is more severe for vulnerable groups because low-income households often already bear high loan interest rates, and the proportion of multiple debtors borrowing from three or more financial institutions is also high. According to the Bank of Korea, as of the end of last year, 34.4% of vulnerable borrowers had a Debt Service Ratio (DSR) of 70% or higher, compared to only 12.1% among non-vulnerable borrowers.

Self-Employed Loans Approaching 850 Trillion KRW

The issue of self-employed individuals facing the double blow of the ongoing fourth wave of COVID-19 and interest rate hikes is also serious. According to the Bank of Korea, as of the end of March, total loans to the self-employed across all financial sectors amounted to 831.8 trillion KRW. This exceeds 40% of nominal Gross Domestic Product (GDP), and the year-on-year growth rate in Q1 this year reached a record high of 18.8%. At the end of March last year, when the COVID-19 crisis began, self-employed loans were around 700 trillion KRW.

Looking at bank corporate loan balances specifically for individual business owners (self-employed), as of the end of May, the balance reached 402.2 trillion KRW, surpassing 400 trillion KRW for the first time. During the 18 months since the COVID-19 crisis began, bank loans to the self-employed increased by 67 trillion KRW. Including the increase in self-employed loans this year, the total is expected to approach 850 trillion KRW.

Especially in sectors such as accommodation and food services, wholesale and retail, and leisure services, the proportion of high-interest loans is also high at 7.0%, 6.5%, and 5.1%, respectively. Vulnerable borrowers who are low-income and multiple debtors are concentrated in accommodation and food services and wholesale and retail sectors, with the proportion of vulnerable borrowers among the self-employed reaching 11.0%. Although they are holding on with government financial support measures such as small business loans, there is a possibility that delinquency rates will rise once these supports normalize.

Interest Rate Hikes Are Inevitable Considering Overheated Real Estate Market

Concerns about increased loan interest burdens always arise when transitioning to a period of interest rate hikes. However, avoiding rate hikes is no longer possible. The prolonged ultra-low interest rate environment of 0.50% annually has caused asset prices to surge, and the resulting inequality and disparities cannot be ignored.

The Bank of Korea’s stance is to raise interest rates while finding ways to support low-income groups. Bank of Korea Governor Lee Ju-yeol recently stated, "Normalization of interest rates is premised on economic recovery," but also emphasized, "Policy support for vulnerable sectors needs to continue as interest rates rise."

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