Low Rate Back Blast
According to the Bank of Korea (BOK) on June 21, outstanding bank loans to households and businesses reached 1.3024 quadrillion (US$1.19 trillion) as of June 15, up 104.153 trillion won (US$94.750 billion) from the 1st day of Aug. last year when the central bank started to lower the basic rate. Among them, loans to companies stood at around 700 trillion won (US$637 billion), with the remaining owed to households.
With interest rates remaining persistently low, bank loans have increased consistently, as shown by 8 trillion won (US$7.2 billion) in Jan. and rose up 9 trillion won (US$8.1 billion) in Feb.
Analysts attributed the surge in household and corporate debt to the BOK's aggressive easing efforts not to lose the growth momentum of the national economy.
In particular, the surge in household loans resulted from lowered interest rates and deregulation for real estate loans, as well as an increase in loans to small and mid-sized companies owing to technology financing.
The central bank has dropped the key rate to 1.5 percentage points from 2.5 percentage point through four rate cuts since August last year. In particular, the central bank cut the benchmark interest rate to a record low of 1.5 percent, from 1.75 percent earlier this month, to counter the negative effects of the Middle East Respiratory Syndrome (MERS) outbreak on May 20.
Market watchers expressed worries over the rapid increase in household and corporate loans, saying that possible defaults in households or businesses could pose a shock to the financial market.
The government has decided to come up with measures next month to effectively control rising household debt. It thinks, however, that the increase of households will not lead to a break-out of crisis for now, and is trying to secure a qualitative improvement instead of regulating the total quantity.
In the meantime, the household savings grew at the slowest pace in 2015 in almost eight years after the 2007 financial crisis, amid low interest rates.
Household deposits at banks stood at 547.74 trillion won (US$494 billion) at the end of April, up 5.1 percent, or 26.55 trillion won (US$24.16 billion), from a year earlier.
Savings deposits, which earn interest during a relatively long period of deposit, stood at 492 trillion won (US$448 billion), up 3.8 percent during the same period, marking the lowest since Sept. 2008 when the comparable figure was a 1 percent increase year-on-year.
In contrast, demand deposits, on which banks usually pay no interest, surged 18.1 percent year-on-year to reach 55.69 trillion won (US$50.68 billion) in April, indicating that low interest rates forced bank customers to manage their money on a short-term basis and chase after other investment chances that provide higher returns.