The Financial Services Commission of South Korea held a meeting in Seoul on March 16 and discussed how to better control household debts after the interest rate hike by the FOMC.
The South Korean government adopted strict lending guidelines covering cooperative financial institutions on March 13 to better control loans in the non-banking sector. In addition, the government is planning to announce new measures for financial soundness on March 20, including mandatory preparation of additional allowances for high-risk loans by cooperative financial institutions.
Last year, the total debt of South Korean households amounted to a record high of 1,344 trillion won. Recently, the government adopted strict lending guidelines in the banking sector. Since then, the amount of outstanding loans has increased in the non-banking sector. In the fourth quarter of 2016, the amount increased by 13.5 trillion won in South Korean non-bank depository institutions to show a rate of increase close to that of banks. During the same period, that of the group of financial brokerage firms including payday lenders jumped by no less than 8.5 trillion won. An increasing number of people with lower incomes and lower credit ratings are being driven to the non-banking sector and high-interest private loans.
The United States is likely to raise its interest rate again within this year. Then, interest rates in South Korea will be adjusted upward. This can lead to an increase in the burden of South Korean households in that most of their debts are based on variable interest rates. According to the Bank of Korea, their interest burden increases by approximately nine trillion won each time the local money market rate increases by one percentage point.