Loan Increase Was Steeper Among Vulnerable Groups

Bottom 20% Income Increased by 8.8%
Many Livelihood Cases, Interest Rate Hike Could Cause Shock
Experts Say "Need Detailed Group Classification for Management"

[Asia Economy Reporter Jang Sehee] As income decreases, the rate of loan growth accelerates, with loans for the bottom 20% income group increasing by nearly 9% last year compared to the previous year. This growth rate stands out when compared to a 5.3% increase for the top 20% income group and a 1.4% increase for the 40% income group. Although the loan amount for the bottom 20% is relatively small compared to the higher income brackets, concerns are rising that these households will face greater shocks as financial authorities have effectively decided to strengthen the Debt Service Ratio (DSR) regulations to manage total household debt, and monetary authorities plan to raise the base interest rate further.

According to the "Household Debt Status by Income and Asset Quintiles" submitted by the Bank of Korea to the office of Park Hong-geun, a member of the National Assembly’s Planning and Finance Committee from the Democratic Party, the household debt for the first income quintile (bottom 20%) was 17.52 million KRW last year, up 8.8% from 16.10 million KRW a year earlier. Even when expanded to the second income quintile (bottom 40%), the loan growth rate was 8.6%, not significantly different from the first quintile. This is higher than the 5.3% increase for the fifth quintile (top 20%) and the 1.4% increase for the fourth quintile (40%).

By asset quintile, the debt growth rate for the second asset quintile (bottom 40%) was the highest at 10.6% across all quintiles. The debt for the second asset quintile was 23.9 million KRW, an increase of 2.3 million KRW from 21.6 million KRW a year earlier. In contrast, debt for the fourth and fifth asset quintiles increased by only 3.0% and 3.8%, respectively. This indicates that due to limited income and assets, these households had no choice but to rely on loans.

Loans for low-income groups are expected to lead to delinquency issues depending on the measures taken by financial and monetary authorities. The Financial Services Commission is scheduled to announce household debt management measures focusing on total loan volume regulation on the 26th. Given that incomes are not increasing, there is a high possibility that loans will be restricted. Additionally, the Bank of Korea plans to raise the base interest rate again next month following the increase in August, which will further increase interest burdens.

Interest Rate Hikes Expected to Concentrate on Vulnerable Groups... Increased Burden on Low-Income Households and SMEs

The Hyundai Research Institute recently stated in its report "Three Major Risk Factors and Implications Hindering Economic Recovery" that "One of the risk factors for the Korean economy is that the shock from interest rate hikes is concentrated on vulnerable groups," adding, "Interest rate increases are likely to pose a burden on low-income households with insufficient income or earnings and many livelihood loans, as well as small business owners and small and medium-sized enterprises (SMEs)."

Bank of Korea Governor Lee Ju-yeol also mentioned during a recent National Assembly audit, "Vulnerable groups who do not feel the warmth of economic recovery inevitably feel the burden of repayment," highlighting the relatively large burden on low-income groups.

Experts advise precise loan management for low-income households. Professor Jeong Se-eun of the Department of Economics at Chungnam National University said, "For households with low income, it is necessary to distinguish between those who should have support extended and those who should be sent to a credit recovery phase." This means that the classification of lower-income households should be detailed, and adjustments should be made if recovery is impossible.

Professor Kim Sang-bong of the Department of Economics at Hansung University emphasized, "For socially vulnerable groups, it is desirable to provide policy support such as microfinance," and added, "Since the rate of debt increase is steep, the direction of total volume regulation itself is appropriate."

Meanwhile, there is also a possibility that the interest rate for the Bank of Korea’s ongoing "Financial Intermediation Support Loan (Geumjungdae)" program for vulnerable groups may be further reduced. During this audit, it was pointed out as a problem that the interest rates for Geumjungdae loans supporting COVID-19 affected companies ranged from 2.62% to 3.34%, and for small business owners from 2.37% to 2.85%, which are higher than the average rates of the five major commercial banks (2.99% to 3.28%).

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