Huge Amount of Loans Exposed to Interest Rate Risks

According to the Bank of Korea, South Korea recorded a total household debt of 1.2573 quadrillion won (US$1.125 trillion) at the end of June this year and variable interest loans are estimated to account for 70% of it. “The ratio of fixed interest loans in the banking sector has risen to some extent but most of the household loans in the non-banking sector are variable interest loans,” the central bank explained, adding, “The total size of variable interest loans is estimated at 880 trillion won (US$787 billion) or so.”

As of the end of September, household loans provided in the banking sector amounted to 688.4 trillion won (US$616.1 billion) and variable interest loans took up 65.4% of it. The ratio of fixed interest loans in this sector had been as low as less than 20% in 2012 but exceeded 30% in March last year and is around 35% at this moment. Meanwhile, the exact size of variable interest loans in the non-banking sector has yet to be calculated.

In the meantime, variable interest loans currently take up the biggest portion of loans for self-employed persons. As of the end of September, this type of loans in the banking sector totaled 256 trillion won (US$229 billion). In short, it can be estimated that the total size of loans exposed to interest rate risks is 1.136 quadrillion won (US$1,016 billion) at the least. Each time the interest rate of household loans increases by one percentage point, the interest burden is estimated to increase by 11.36 trillion won (US$10.16 billion).

“The occurrence of a crisis hinges on how a rise in interest rate will affect the bottom 10% of borrowers,” said an industry source. According to the central bank, the number of households that have debts exceeding their financial assets and spend at least 40% of their disposable incomes on principal and interest repayment totaled 1.34 million as of the end of March last year, equivalent to 12.5% of the total indebted households.