Household Debt Piling Up as Interest Rates Rise

Five Major Banks' Household Loans Approaching 700 Trillion Won Milestone

[Asia Economy Reporter Park Sun-mi] Amid rising market interest rates, both credit loan and mortgage loan rates continue to increase, pushing the household loan volume of the five major commercial banks to the brink of surpassing 700 trillion won. Despite the increased burden of loan interest, the explosive growth in household debt has further heightened the risk of financial market instability. There is growing demand for investments in stocks, cryptocurrencies, and other assets that yield higher returns than the 'tiny' bank deposit interest rates. Moreover, since the Financial Supervisory Service's 'Household Loan Management Measures' will only be fully implemented in July, there is a time lag, raising concerns that the trend of increasing debt while bearing higher loan interest will continue for the time being.

According to the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?as of the end of April, their outstanding personal credit loans reached 142.2278 trillion won. This is a sharp increase of 6.8401 trillion won compared to the end of March, marking an all-time high. This monthly increase is the largest since November last year (when it rose by 4.8495 trillion won), breaking the record after five months. It also exceeds the monthly credit loan increase limit of 2 trillion won set by financial authorities by more than three times.

Household loan balances also rose to 690.8622 trillion won last month, up 9.2 trillion won from 681.6357 trillion won at the end of March. The increase of over 9 trillion won last month is nearly three times the increases seen in February (3.79 trillion won) and March (3.4 trillion won). Although stricter real estate market regulations have slowed the growth of mortgage loans, they have had no effect in curbing household loan growth.

The problem lies in rising loan interest rates. According to the latest statistics from the Bank of Korea, the weighted average interest rate on all household loans at deposit banks in March was 2.88%, up 0.07 percentage points from 2.81% in February. Credit loan rates rose 0.09 percentage points from 3.61% to 3.70%, and mortgage loan rates increased 0.07 percentage points from 2.66% to 2.73%, continuing their upward trend for two and seven consecutive months, respectively. The credit loan rate is at its highest since February last year (3.70%), and the mortgage loan rate is at its highest since June 2019 (2.74%).

Yoon Doo-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, cited data submitted by the Bank of Korea, stating that when household loan interest rates, including mortgage and credit loans, rise by 1 percentage point, interest payments increase by 11.8 trillion won. While financial consumers are increasing household debt despite the higher loan interest burden, the economic environment has not clearly improved due to the ongoing COVID-19 situation, and money is flowing into speculative assets, which analysts say has actually increased the risk of financial instability.

Typically, defaults or delinquencies occur after a certain period following loan issuance. Loans issued during periods of rapid loan growth are relatively more likely to become non-performing. This is why there are concerns that the explosive growth in household debt could threaten financial stability.

Money Flows Out of Time Deposits and Builds Up in 'Parking Accounts'

The increased household debt is also cited as a factor accelerating 'money moves' into investment and speculative assets. As of the end of last month, the demand deposit balance at the five major commercial banks stood at 661.024 trillion won, up 4.54 trillion won from the end of March. In February, it increased by 29 trillion won, and in March by about 18 trillion won. This means it has surged by nearly 52 trillion won over three months. Demand deposits include checking accounts and money market deposit accounts (MMDA), which depositors can withdraw at any time, indicating that these funds are waiting to be invested.

Conversely, time deposits, which are meant to be deposited and managed, are rapidly declining like an ebb tide. At the end of last month, the time deposit balance at the five banks was 614.7991 trillion won, down 12.8814 trillion won compared to the end of March. Considering that 2.6667 trillion won was withdrawn in March, this is an unusually large decrease.

Professor Kim Sang-bong of Hansung University’s Department of Economics analyzed, "The surge in credit loans and the reduction in deposits indicate that funds have moved to stocks or the cryptocurrency market. Previously, it was thought that money moves led funds into real estate, but given the high prices now, that outlook is difficult." He also pointed out, "Especially virtual assets are purely driven by supply and demand, so there is a risk of sudden crashes without reason."

The Korea Institute of Finance also expressed concern about excessive household debt growth in a recent report, stating, "As the temporary measures by financial authorities, such as maturity extensions or interest payment deferrals implemented due to COVID-19, normalize, latent non-performing loans may surface." It added, "Soft landing measures that only adjust loan repayment methods and periods may only delay the recognition of non-performing loans."