BOK "Household and Corporate Loan Delinquency Rates Rising... Potential Threat to Financial Stability"

Bank of Korea Releases December Monetary and Credit Policy Report
Household Loans Expected to Stabilize but Housing Market Remains a Variable
Delinquency Rates Continue to Rise... Financial Stability Requires Attention
Rising Household Loan Interest Rates Expected to Decline

The Bank of Korea recently emphasized that the delinquency rates on household and corporate loans have been continuously rising, warning that this could potentially undermine financial stability and thus requires careful attention.

While the high household debt ratio, which has emerged as a major risk factor for the Korean economy, is expected to gradually stabilize, the Bank of Korea noted that it cannot rule out the possibility of further expansion depending on future real estate market conditions. Corporate loans are also expected to continue increasing for the time being.

Continued Increase in Household and Corporate Loans

In the Monetary and Credit Policy Report released on the 14th, the Bank of Korea explained the recent situation regarding household and corporate debt. According to the Bank, amid a sustained high-interest-rate environment, the scale of household loan growth has expanded, and corporate loans have also increased significantly, raising concerns about the accumulation of macro leverage centered on the private sector.

Regarding household loans, the Bank's tightening monetary policy led to a gradual decline since September last year, but from April this year, expectations of rising house prices revived, leading to an increase again, mainly in housing-related loans. After fluctuating, the loan volume expanded significantly in October and continued to increase last month, primarily driven by mortgage loans (5.8 trillion KRW).

Corporate loans also showed a sharp increase. This was influenced by companies preferring loans over corporate bond issuance due to the expansion of bank bond issuance and rising interest rates. In particular, when examining the loan proportions by industry, the concentration of loans in the real estate sector continued to rise.

Household Loan Stabilization Expected... Housing Market Remains a Variable

The Bank of Korea expects the scale of household loans to stabilize downward relative to nominal GDP for the time being, as housing transaction volumes decline and government management intensifies. However, it also noted that the situation will be significantly influenced by the housing market and government policies.

The Bank explained, "The outlook for the housing market remains highly uncertain. Housing sale prices expanded their increase after July but slightly slowed in October, with expectations for price increases also somewhat declining. Meanwhile, jeonse (long-term lease) prices turned upward since August, especially for apartments in Seoul, due to increased demand, with the rate of increase expanding."

Given the difficulty in predicting the housing market's direction, it is also challenging to gauge the scale of related mortgage loans and household debt.

Regarding corporate loans, the Bank forecasts that the upward trend will continue for the time being, substituting for corporate bond issuance.

Rising Loan Delinquency Rates... Caution Needed

The Bank of Korea emphasized that delinquency rates on household and corporate loans are continuously rising, and there is a possibility of further increases due to downside risks in the real estate market, warranting caution.

According to the Bank, new delinquencies in household loans are increasing mainly among vulnerable borrowers and non-bank financial institutions, while corporate loan delinquencies are rising rapidly in the non-bank sector due to steady defaults in construction and real estate industries amid a sluggish real estate market.

The Bank stated, "Since household and corporate debt levels are estimated to exceed thresholds that could negatively impact our economy in the medium to long term, it is necessary to consistently implement an appropriate policy mix to gradually reduce the debt-to-nominal GDP ratio."

Household Loan Interest Rates That Had Been Rising... "Downward Pressure Will Increase"

Interest rates on household loans, which had recently been on the rise, are expected to face increasing downward pressure, especially on fixed-rate mortgage loans.

Household loan interest rates (based on new loan amounts) turned upward in August and saw an expanded increase in October. Interest rates rose for both mortgage and credit loans, with fixed-rate mortgages increasing more than variable-rate ones.

The Bank of Korea explained that this was due to significant increases in both long- and short-term benchmark interest rates. Concerns over the prolonged tightening stance of the U.S. Federal Reserve led to continued rises in long-term benchmark rates (5-year bank bonds) and short-term benchmark rates (3-, 6-month, 1-year bank bonds, and COFIX).

The Bank noted that the sharp rise in household loan interest rates in October was partly due to banks raising their spread rates (reducing preferential rates).

Until September, competition among banks to attract mortgage loan customers had limited the rise in loan interest rates by lowering spread rates, but in October, banks increased spread rates, which expanded the rise in loan interest rates.

The Bank analyzed, "When separating the factors affecting household loan interest rate changes from August to October into domestic and overseas factors, fixed-rate mortgages were more influenced by overseas factors, while variable-rate mortgages and credit loans were more affected by domestic factors."

Looking ahead, the Bank explained that household loan interest rates are expected to face downward pressure, especially on fixed-rate mortgages, as the sharp drop in long-term benchmark rates in November is reflected with a time lag.

However, it added that the rise in short-term benchmark rates and increases in spread rates could limit the decline in loan interest rates.

The Bank of Korea stated, "While closely monitoring disruptive factors that could affect the transmission of monetary policy, it is also necessary to carefully examine developments in market supply and demand conditions, banks' lending attitudes, and other determinants of loan interest rates, as well as changes in household loan trends resulting from these impacts."

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