"Private Interest Burden to Increase by 33 Trillion Won Annually by End of Next Year Due to Interest Rate Hikes"

Risk of Corporate and Household Loan Interest Burden Increasing by KRW 16.2 Trillion and KRW 17.4 Trillion Respectively
"Urgent Need to Improve Debt Structure Including Expansion of Fixed-Rate Loan Proportion"

[Asia Economy Reporter Park Sun-mi] A survey revealed that if the base interest rate continues to rise, the increase in interest burden on companies and households by the end of next year will reach 33.6 trillion KRW.

On the 18th, the Korea Economic Research Institute forecasted in its "Analysis of Private Debt Repayment Burden Due to Interest Rate Hikes" that the annual interest burden on corporate loans will increase by at least 16.2 trillion KRW from September this year to the end of next year due to the continued base rate hikes by the Bank of Korea. The weighted average borrowing rate was assumed to be 4.9% at the end of this year and 5.26% at the end of next year based on the expected path of base rate increases.

In particular, financially vulnerable marginal companies, which are susceptible to interest rate hikes, are expected to see their annual interest burden reach 9.7 trillion KRW by the end of next year, a 94.0% increase compared to 5 trillion KRW in September this year. The loan delinquency rate is also expected to more than double from the current 0.27% to 0.555% by the end of next year, indicating a significant rise in the risk of insolvency among marginal companies. The annual interest burden on self-employed individuals is also projected to increase by about 5.2 trillion KRW during the same period, raising the average annual interest burden per self-employed household by 943,000 KRW.

The annual interest burden on household loans is also expected to increase by at least 17.4 trillion KRW from September this year to the end of next year, which translates to an increase of about 1.32 million KRW per household annually. The weighted average borrowing rate was estimated at 4.7% at the end of this year and 5.06% at the end of next year. Especially for vulnerable borrowers (multiple debtors who are low-income or have low credit), the interest burden per household is expected to increase by about 3.3 million KRW during this period, exacerbating financial hardship among vulnerable groups due to increased debt burden.

The household loan delinquency rate projected by the Korea Economic Research Institute is expected to rise from the current 0.56% to about 1.02% by the end of next year. It analyzed that if shocks occur domestically or internationally due to interest rate hikes, the debt repayment ability of borrowing households, especially vulnerable households, will deteriorate, leading to consumption slowdown and delays in principal and interest repayments, which will negatively impact the overall financial system. Given the close relationship between household debt and the real estate market in the Korean economy, it also suggested that future household debt could increase asset market volatility and act as a risk factor for the entire financial system.

Lee Seung-seok, a senior researcher at the Korea Economic Research Institute, stated, “To prevent the realization of latent risks caused by interest rate hikes, it is urgent to strengthen monitoring of financial soundness and insolvency risk indicators, as well as improve debt structure by expanding the proportion of fixed-rate loans.” He added, “Policies are needed to prevent a vicious cycle where risks from insolvency of marginal companies and vulnerable borrowers spread as systemic risks, rather than short-sighted, benevolent policies like cash support.” He further noted, “It is desirable to strengthen credit screening to prevent excessive funds from being supplied to marginal companies, thereby avoiding accumulation of their latent insolvency, and to modernize supervision so that non-bank financial institutions, which have recently rapidly increased corporate credit, can enhance their own capacity to respond to insolvency.”

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