[Haneun Big Step] Variable Rate Borrowers and Yeongkkeuljok in Crisis... Multiple Debts Total 600 Trillion Won

Bank of Korea Raises Base Interest Rate by 0.5%P
Households to Pay Additional 6.7 Trillion KRW, Corporations 3.9 Trillion KRW in Interest
Credit Loan Rates Surpass 7%, Overdrafts Exceed 5%

2030 Generation Turns to Secondary Finance, Delinquency Amounts Surge
Experts Say "Base Interest Rate Will Have to Rise Again"

[Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] The financial market is expected to be shaken by the Bank of Korea's first-ever big step (a 0.5 percentage point increase in the base interest rate). Although the decision was made to curb rapidly rising inflation and keep pace with the U.S. Federal Reserve's interest rate hike trend, the burden on borrowers with variable-rate loans, who make up the majority of the loan market, is inevitably increasing significantly. In particular, analyses suggest that multiple debtors who have borrowed from several places and the Yeongkkeul (investing by gathering every last bit of money) generation are taking a direct hit.

On the 13th, the Bank of Korea's Monetary Policy Committee raised the base interest rate from 1.75% to 2.25%. This considered the domestic consumer price inflation rate soaring to the 6% range, expected inflation nearing 4%, and concerns over the inversion of the Korea-U.S. base interest rates. This is the third rate hike following those in April and May. Both the 0.5 percentage point increase and three consecutive hikes are unprecedented decisions.

The decision to raise the base interest rate is expected to have a significant ripple effect across the domestic loan market. This is because the majority of individual and corporate borrowers have variable-rate loans. According to the Bank of Korea's Economic Statistics System, as of May, 77.7% of household loan borrowers chose variable interest rates, marking the highest in 8 years and 2 months. In the corporate credit sector, which has recently expanded significantly due to household loan regulations, variable-rate loans accounted for 70.9%, the highest since January 2012.

As of the end of March this year, household loans disclosed by the Bank of Korea totaled 1,752 trillion won. Assuming the loan interest rates uniformly increased by 0.5 percentage points and the proportion of variable-rate loans at other financial institutions is the same, the annual household interest burden would increase by approximately 6.7 trillion won. For a 300 million won loan, monthly interest would increase by about 120,000 won. Corporations would have to bear an additional interest burden of about 3.9 trillion won annually. The Korea Chamber of Commerce and Industry's Sustainability Growth Initiative (SGI) estimated, "Large corporations are expected to see an increase of 1.1 trillion won, and small and medium-sized enterprises 2.8 trillion won."

Multiple debt exceeds 600 trillion won... "Base interest rate to rise again"

Loan interest rates at domestic banks have already been rising in anticipation of the Bank of Korea's rate hike. For unsecured loans, the upper limit interest rate has surpassed 7%. On this day, Shinhan Bank's 'Solpyeonhan Jikjangin Loan S' recorded a maximum interest rate of 7.36% (1-year financial bond base rate 3.66% + spread 3.70%). Hana Bank's Premium Jikjangin Loan rate also reached 7.354% (market rate applied, 1-year maturity). The interest rates on overdraft accounts, which office workers use like emergency funds, have also begun to approach the 5% range (based on credit rating grade 1).

The problem lies with multiple debtors who have borrowed from three or more places. According to data submitted by the Financial Supervisory Service to Lee Jung-moon, a member of the Democratic Party, the amount of multiple debts at the end of last year was 603 trillion won, a 22.8% increase compared to 2017. During the same period, the average loan size per multiple debtor increased by 16 million won to 134 million won. The number of multiple debtors also rose from 4.17 million to 4.51 million.

Many multiple debtors have low credit or income and have borrowed from several places, or are in their 20s and 30s who attempted Yeongkkeul to pay high housing prices. From the end of 2020 to April this year, the delinquency amount of multiple debtors under 30 surged by 52.7%. Moreover, a significant number of multiple debtors have turned to the secondary financial sector with higher interest rates; the increase in multiple debts at savings banks (73.8%) far outpaced that at banks (31.6%). This is why warnings are emerging that multiple debtors and delinquent borrowers could become triggers for economic and financial market crises.

Experts predict that the base interest rate may be raised again within the year. Professor Kim Dae-jong of Sejong University's Department of Business Administration explained, "The U.S. is targeting a year-end base interest rate of 3.5%, and further rate hikes are likely. Considering that Korea has maintained a base interest rate 1 percentage point higher than the U.S., additional hikes are inevitable."

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