[Interest Rate Hike] "If Household Loan Interest Rates Rise by 1%P, Bank Delinquency Rates Increase Up to 4.1 Times"

[Image source=Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] As the Bank of Korea raised the base interest rate on the 26th, claims have been made that if household loan interest rates rise by up to 1 percentage point in a short period due to the rate hike, the delinquent amount and delinquency rate of household loans in the banking sector could increase by up to 4.1 times.

The Korea Economic Research Institute under the Federation of Korean Industries analyzed data from the Bank of Korea and the Financial Supervisory Service's statistical analysis and information systems in its report titled "Impact of Interest Rate Hikes and Black Swan Events on Household Loan Delinquency Rates and Implications." The report analyzed that if household loan interest rates rise by 1 percentage point in a short period due to the base rate hike, the delinquent amount of household loans in the banking sector could increase by 2.7 trillion to 5.4 trillion KRW, and the delinquency rate could surge by 0.32 to 0.62 percentage points.

The Korea Economic Research Institute estimated that the delinquency rate of household loans in the banking sector would increase by 0.32 percentage points if household loan interest rates rise by 1 percentage point. Considering that the current balance of household loans in the banking sector is 868.5 trillion KRW as of the first quarter of this year, the increase in delinquent household loans is estimated to be 2.7 trillion KRW. Furthermore, if a 'Black Swan' event?an unexpected and extraordinary incident like the 2008 U.S. subprime mortgage crisis triggered by financial deregulation?occurs alongside the interest rate hike, the delinquency rate could rise by 0.62 percentage points, and the delinquent amount could increase by 5.4 trillion KRW.

(Data provided by Korea Economic Research Institute)

Considering that the delinquent amount of household loans was 1.7 trillion KRW and the delinquency rate was 0.2% in the first quarter of this year, this implies that the delinquent amount and delinquency rate could increase approximately 2.6 to 4.1 times. The Korea Economic Research Institute evaluated that "the risk of domestic and international economic downturn due to the spread of the Delta variant virus is very high, and a sudden shift in monetary policy could cause the side effect of a sharp rise in delinquency rates."

Concerns about financial soundness have emerged as such forecasts come out amid a significant increase in household loans recently. Household loans in the banking sector have grown at an average annual rate of 7.0% over the past decade, increasing from 435.1 trillion KRW in the first quarter of 2011 to 868.5 trillion KRW in the first quarter of this year.

The Korea Economic Research Institute explained that the rapid increase in household loans is due to the weakening of household income sources caused by the slowdown in economic vitality and the significant rise in mortgage loans, which account for 60 to 70% of household loans, driven by housing demand. Mortgage loans in the banking sector increased from 294.1 trillion KRW in the first quarter of 2011 to 598.9 trillion KRW in the first quarter of this year, growing at an average annual rate of 7.2%, surpassing the average growth rate of household loans. The share of mortgage loans within household loans rose from 67.6% to 69.0% during the same period.

The Korea Economic Research Institute analyzed that if the increase in household loan interest rates is combined with a decline in housing prices and a slowdown in economic growth, household financial distress could worsen further. The institute argued, "Even when adjusting interest rates, it is necessary to operate them stably at a level that the market can bear," and added, "Policy efforts should also be accompanied by creating a business-friendly environment to boost economic growth momentum and increase jobs, thereby expanding household income sources."

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