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FSS vows to keep eye on debt

Concerns of ‘balloon effect’ spur emergency moves from watchdog
Mar 11,2017
Korea’s financial watchdog vowed Friday to monitor household debt in Korea more closely, particularly focusing on the lending affairs of noncommercial banks, also known as second-tier lenders, the Financial Supervisory Service chief said.

Zhin Woong-seop, governor of the FSS, said the current situation related to household credit in Korea calls for an emergency response by the financial authorities. In a meeting with the chiefs of financial associations on Friday, Zhin said managing household debt and related risk is more important than ever due to uncertainties from both home and abroad.

Household debt in Korea reached a record high last year, amounting to 1,344 trillion won ($1,173 billion) by the end of fourth quarter, nearly a 4 percent rise compared to the third quarter, or about a 12 percent year-on-year increase.

Based on figures from January and February, the credit issued by local commercial banks has shown signs of stabilization, rising 3 trillion won during the period, a result of the government’s continuous attempt to tighten lending guidelines. The size of household credit by local banks rose 5 trillion won during the same period in 2016.

What concerns authorities, however, is the ballooning size of debt doled out by secondary lenders such as savings banks, credit cooperatives and insurance companies. FSS data showed that from the beginning of January to the end of February, the amount of new credit scooped up by local borrowers from secondary lenders totaled 5 trillion won, a 1.3 trillion won rise compared to the same period a year earlier. In total, the amount of household debt in Korea rose 8 trillion won.

“Concerns of a ‘balloon effect’ on borrowings from second-tier lenders are being suggested [by the local media] and the rise in seasonal demand in the near future may lead the household debt growth rate to expand again,” said Zhin. “Even in terms of economic sentiment, it is important to take control over household debt growth from the start of the year at first quarter.”

Addressing the banks to stay on track in adopting new debt screening guideline focusing on risk management above all else, Zhin also said the FSS will monitor the lending activities of local financial institutions and status of debt on weekly basis, drastically moving up the cycle of inspection which took place monthly before. “By compiling all the statistics related to household debt each week, we can better understand the trend and respond more quickly [to any anomaly],” Zhin explained.

Also to respond to the apprehensions on growing debt by second-tier lenders, the FSS will inspect 92 secondary lending companies. The rapid growth of debt from these companies is particularly alarming because of the risks on these loans that mainly cater to low-income households or those with low credit ratings, meaning their ability to repay can be seriously undermined in cases such as interest rate hikes.

After the decision by Constitutional Court to uphold the impeachment of President Park Guen-hye, Zhin convened an emergency meeting and asked for a 24-hour monitoring of the local financial market.

“Along with political uncertainties, there are also outside factors, which could increase the volatility of local financial market such as interest rate hike by the U.S. Federal Reserve,” Zhin said. “We must monitor closely the key index of the financial market as well as movement of foreign investors and respond swiftly in case of any abnormality.”


BY CHOI HYUNG-JO [choi.hyungjo@joongang.co.kr]