Household Loans in Korea Increased by 8% Annually Over 10 Years... Debt Repayment Burden Higher Than Major Countries

Korea Institute of Finance 'Domestic Banks Household Loan Risk' Report
Non-performing Loans Below Fixed Rate Expected to Surge to 3 Trillion Won by Year-End

Household loans across all financial sectors in South Korea have rapidly increased at an average annual rate of 8% from 2010 to 2021. On the 3rd, the Korea Institute of Finance released the report "Domestic Bank Household Loan Risks," which stated that the household debt-to-GDP ratio in South Korea exceeds 100%, compared to major countries such as the United States and Japan where it is below 80%.

Senior Research Fellow Lee Ji-eon, who authored the report, said, "South Korea's household debt service ratio (DSR) is approaching 14%, whereas major countries have rates between 5% and 8%, indicating issues with borrowers' repayment capacity." He added, "Given the excessive level of household debt relative to economic size and repayment ability, concerns are growing that household debt risks will materialize if macroeconomic conditions, such as recent interest rate hikes, continue to deteriorate."

In particular, it was analyzed that the "non-performing loans (NPLs)" classified as 'fixed overdue loans'?household loans overdue by more than three months?at domestic banks will surge to 3 trillion won by the end of this year. According to the report, the household loan NPL ratio is expected to rise from 0.18% in the fourth quarter of last year to 0.33% by the end of this year. The report estimated econometric models of the NPL ratio and macro variables for household loans from 2010 to last year and used these to predict this year's NPL ratio.

According to the report, although non-performing loans are expected to surge, the overall loss absorption capacity of the banking industry is anticipated to be sufficient. This is because domestic banks' capital stood at 279 trillion won at the end of last year, and net income exceeded 18 trillion won last year. Senior Research Fellow Lee said, "However, since the NPL ratio, which had sharply declined since 2012, is now reversing to a rapid increase, banks need to closely monitor changes in NPLs and thoroughly manage household loan risks."