[The Revenge of Debt] 2021 That Started and Ended with Debt

Household Debt Increased by 117 Trillion Won in 9 Months This Year
Both Households and Businesses Endured by Borrowing

[Asia Economy Reporters Sunmi Park, Kiho Sung] It was a year that started and ended with debt. As the prolonged COVID-19 pandemic forced households and businesses to borrow money to survive, the number of borrowers surged this year, and financial authorities unleashed unprecedentedly stringent regulations to curb the snowballing household debt. With lending doors abruptly closing in the second half of the year due to regulatory orders, genuine borrowers faced a loan cliff, and vulnerable groups unable to cross the threshold of formal financial institutions turned to illegal private loans. To make matters worse, as the base interest rate hikes took full effect, not only the common people who borrowed to cover housing and living expenses but also borrowers who excessively took out loans amid last year's Yeongkkeul (borrowing to the limit) and Debt Investment (debt-financed investment) frenzy began to feel the real burden of interest payments. The counterattack of debt had begun.

◆Both Households and Businesses Survived by Borrowing= According to the Bank of Korea and financial sectors on the 29th, the outstanding household debt (household credit) from January to September this year was 1,844.9 trillion won, a 9.7% increase compared to the same period last year when COVID-19 first broke out. The scale of household debt has surpassed last year's South Korea's real Gross Domestic Product (GDP) of 1,836 trillion won. The household debt increased by 117 trillion won in just nine months this year, a figure similar to last year's total increase of 127 trillion won.

Over the past two years of the COVID-19 pandemic, household debt has ballooned by 244 trillion won. The household debt-to-disposable income ratio rose to 174.1%, up 5 percentage points from 169.1% at the end of last year.

Last year, the net increase in household debt set record highs every month. This year, household loans also started with a sharp increase from January. The effects of COVID-19 and the Yeongkkeul and Debt Investment frenzy continued into early this year. The difference is that financial authorities introduced strong loan regulations one after another to curb Yeongkkeul and Debt Investment, which slowed the growth rate from the second half of the year, while housing costs surged sharply, causing a boom in housing-related loans. The year-on-year growth rate of mortgage loans continued to rise at 8.5% in Q1, 8.6% in Q2, and 8.8% in Q3. In contrast, other loans including credit loans peaked at a 12.8% growth rate in Q2 but declined afterward due to loan restrictions aimed at blocking borrowing for Yeongkkeul and Debt Investment in the second half of the year.

This year, corporate loans also increased to an all-time high, mainly in non-bank sectors such as mutual finance. As the COVID-19 crisis prolonged, loans to small and medium enterprises and individual business owners increased, with corporate loans reaching 1,497.8 trillion won by the end of Q3, a 12.4% increase compared to the same period last year. This is an increase of 138.4 trillion won compared to the end of last year.

In particular, corporate loans at deposit banks recorded 1,055.2 trillion won, showing an 8.2% growth rate, while non-bank financial institutions recorded 442.6 trillion won, showing a high growth rate of 24.0%, centered on mutual finance (28.7%). This abnormal phenomenon was influenced by the shift of some household housing purchase fund demand from mortgage loans to rental business loans due to strengthened household loan regulations, causing a surge in non-bank corporate loans. The share of corporate loans in total non-bank loans surged from 28.1% at the end of 2015 to about 48.2% by the end of September this year.

◆"Can't Sleep Because of Debt"... Interest Bomb Amid Regulatory Crackdown= This year saw a series of high-intensity loan regulations that overshadowed the surge in household debt. The regulations became full-fledged with the appointment of Financial Services Commission Chairman Ko Seung-beom, known as the "loan grim reaper." Chairman Ko, who took office in August, issued a drastic measure of total volume regulation (managing growth rate at the 6% level) to rein in household debt exceeding 1,800 trillion won.

As a result, some banks had to suspend loans or drastically reduce loan limits. Starting with NH Nonghyup Bank, which completely stopped real estate secured loans in August, major commercial banks halted some new loan issuance. However, as household debt growth did not subside, the government announced advanced household debt management measures in April, including the application of the Debt Service Ratio (DSR) by borrower, followed by early implementation of DSR stages 2 and 3 in October, strengthening DSR for the secondary financial sector, installment repayment, and stricter loan screening.

Initially, the April plan aimed to gradually expand the DSR regulation target from total loans exceeding 200 million won starting July next year, and loans exceeding 100 million won starting July 2023. However, to curb household debt growth, the implementation of stage 2 DSR was advanced by six months and stage 3 DSR by one year.

With two base rate hikes combined with loan regulations, borrowers are facing the side effect of an interest bomb. Among new household loans, the proportion of variable-rate loans reaches 80%. As of October, the weighted average interest rate on new household loans at deposit banks was 3.46% per annum, nearly 1 percentage point higher than 2.79% at the end of last year. Some banks' mortgage and credit loan rates have soared to 5-6% per annum.

The balloon effect, where loans in the secondary financial sector surged due to sudden tightening of loans by commercial banks, is also considered one of the loan growth risks closely monitored by the financial sector this year. For household loans, while the loan growth rate at banks was 9.9% in Q3 compared to the same period last year, non-bank sectors recorded a higher 10.8%. Before the COVID-19 outbreak at the end of 2019, bank household loan growth was 7.7%, while non-bank was -0.7%, showing a clear difference.

Experts gave a failing grade to household debt management this year. Professor Oh Jung-geun of Konkuk University's Department of Economics said, "This year, the policy framework was based on regulating total volume to suppress household loans, but it failed to address the fundamental causes. Low-income people were driven to high-interest illegal private loans due to difficulties in securing living or business funds, and this trend will continue."

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