With Interest Rate Hike Approaching... Multi-Debtor's Debt Per Person Hits Record High of 134 Million Won

134.3 million KRW as of Q2
Concerns over deterioration after interest rate hikes... "Management needed while it can be endured"
Corporate bond rates hit highest in 2 years 10 months... Increased funding pressure

[Asia Economy Reporter Jang Sehee]"I took out the maximum credit loan from both the 1st financial sector (banks) and the 2nd financial sector, and then also took out a mortgage loan, but the principal and interest I have to pay every month are too high. To cover this, I ended up using card loans and cash services, becoming a multiple debtor. I'm anxious, wondering if I have to take out a loan from a private lender as well." (Case of Mr. A posted on an internet community)

Under low interest rates, the debt size per person of 'multiple debtors' who borrowed money from three or more financial institutions, regardless of banks or non-bank sectors, has reached an all-time high. With the base interest rate hike next month becoming a foregone conclusion, concerns are rising that the debt repayment of these borrowers could lead to financial instability.

According to the 'Debt Trend per Multiple Debtor' submitted by the Bank of Korea to the office of Park Hong-geun, a member of the National Assembly's Planning and Finance Committee from the Democratic Party, the debt size of these borrowers was 134.3 million KRW as of the end of the second quarter (end of June), marking the highest since statistics began in 2012.

The debt size per multiple debtor has steadily increased, reaching 113.5 million KRW at the end of 2016 and 131.5 million KRW at the end of last year. The Bank of Korea explained that this is due to the growth in the gross domestic product (GDP) and the continuation of the low interest rate trend.

The proportion of multiple debtors' debt in total household loans also increased. In the second quarter of this year, the outstanding loan balance ratio of multiple debtors was 31.9%, up 0.5 percentage points from 31.4% in the second quarter of last year, and the proportion of multiple debtors among all borrowers rose by 0.3 percentage points to 21.8% during the same period.

With the government's strengthened household debt regulations and the base interest rate hike coinciding, the shock that multiple debtors will face is expected to grow. If total volume regulations are actively enforced, short-term credit loans with maturities of about one year must be repaid immediately if extensions are not granted. In this process, if the amount borrowed exceeds repayment ability, it could lead to credit delinquency. The proportion of variable interest rates in household loans also reaches 80.4%, indicating that many borrowers will face increased interest burdens due to the rate hike.

Experts agree that as the debt size of multiple debtors grows, the possibility of defaults cannot be ruled out. Professor Ha Jun-kyung of Hanyang University’s Department of Economics said, "Multiple debtors may face defaults during the deleveraging process," and advised, "Management should be done while they can withstand shocks."

Representative Park said, "To prevent credit risks for multiple debtors, a system for smooth credit forgiveness for borrowers with good repayment records and a livelihood finance recovery system must be established."

The interest rate hike is signaling an emergency not only for households but also for corporate financing.

According to the Bank of Korea, if the base interest rate rises by 0.5 percentage points, interest expenses for large corporations and small and medium enterprises are expected to increase by 700 billion KRW and 3.6 trillion KRW, respectively. In particular, the market benchmark interest rates, including the 3-year government bond yield and corporate bond yields, have recently been on the rise. On the 18th, the 3-year maturity corporate bond with an 'AA-' rating was at 2.333%, the highest since December 5, 2018. This means companies have to pay more interest to raise funds. A Bank of Korea official explained, "Corporate bond yields have risen in tandem with government bond yields."