Analysis: Credit bubble in S.Korea

By JONG-HEON LEE, UPI Business Correspondent

SEOUL, Dec. 5 (UPI) -- In early 2001, Yoon Hee-sook, a 45-year-old housewife, borrowed 60 million won ($49,500) on credit-card loans to acquire a small grocery shop, in hopes of supporting her family, including a laid-off husband.

It was not difficult to receive cash loans from local card firms, which were launching a high-profile campaign of retail lending and credit-card sales, basking in a government-led drive to boost domestic consumption.


Seven months later, Yoon was forced to shut down the shop, which had been ravaged by floodwaters and landslides. As she has been unable to pay interest for the loans since then, Yoon got another card for cash advances -- but it charged a high interest rate.

With debts mounting, she declared bankruptcy last month and applied for the personal debt workout program.

Yoon was just one of more than 2.5 million people who have defaulted on credit-card loans -- about 10 percent of the country's employed workers. The number is still sharply increasing as some 70,000 individuals have been ended up in default every month since August, and 90 percent of their insolvency stemmed from credit-card overuse, according to the watchdog Financial Supervisory Commission.


The "credit crisis" came after a credit-card storm had hit the country for the past years, which enjoyed fast economic growth. Individual consumers, encouraged by record-low interest rates, spending sprees and easily available credit cards, have been borrowing beyond their means.

The country's 25 credit card companies, vying for a bigger share of the booming market, signed up customers at sidewalk stands without checking their credit records, which led to the soaring portion of young debtors in their 20s and 30s. Even teenagers with no income have more than one credit card.

In this country, most adults carry several credit cards each. Those who don't have a job. survive on credit-card cash advances. When bills come due, as they did for Yoon, they get another credit card and repay the debt, using cash advances with the new card. Some have eight cards to avoid bankruptcy.

The government has encouraged consumers to use credit cards by exempting credit-card interest from taxes and lowering sales tax on luxury goods, in a bid to revive domestic spending and ensure transparent tax collection.

As a result of the government-led consumption drive, the country's household debt has surged to 75 percent of gross domestic product as of the end of September, rising from 70.6 percent in June, and rising sharply from 50 percent in 1999.


Household credit, including household loans and credit sales, rose to 424 trillion won ($350 billion) in September, with the average debt per household surging to 29 million won ($23,970), the central Bank of Korea said in a report released Wednesday.

The average debt per household has increased by 7 million won ($5,785) since the government kicked off the campaign of private spending a year ago. "The figure is expected to break through the 30 million won ($24,790) mark by the end of this year," said Choi Young-yop, a senior official at the bank.

Analysts warn of a bursting of the consumption credit bubble and subsequent mass bankruptcies of households, which they say can bring South Korea to the brink of a second financial crisis.

Lending institutions and credit card companies have recently launched intensive attempts to cut the default ratio on credit card payments and reduce cash advances, but this measure has further aggravated the financial status of indebted individuals.

"People who used cash advances with high interest rates to clear their loans in arrears are feared to be hit hard most from the tightened regulations," said an inspector at LG Card Co, the country's biggest credit-card issuer.


With household debts sharply growing, local credit card firms saw bad-credit clients surge 41.8 percent from 719,000 at the end of last year to 1.02 million in October. Local commercial banks are also suffering a high delinquency rate due mainly to financially-strapped card holders.

Overdue credit card bills at 17 banks climbed to 11 percent of total loans in September from 7 percent in December last year, compared with double the level in the United States.

More alarmingly, 60 percent of the loan delinquents were "excessive borrowers" whose total debts to banks or card firms exceeded 250 percent of annual income. "The rise of household debt in Korea is unprecedented by any standards," said Choi Gong-pil, a research fellow at the Korea Institute of Finance. "It is quite worrisome that household debt is rising much faster than GDP," he said.

Economists say that a possible rise in local interest rates would trigger financial turmoil because increasing loans have been mainly to lower income households.

South Korea's interest rates have been near a record low of 4.25 percent since May, as part of efforts to support growth despite concerns that rising housing prices and credit card spending were fuelling inflation.

"A possible surge in market interest rates will force indebted households to sell off collateralized houses, which could lead to a bursting of the real estate price bubble. Consumer bankruptcy can bring about a financial crisis," said Cho Myong-hyun, a Korea University professor.


"The credit card industry could potentially become the biggest threat to the Korean economy in coming years," said Kim Jung-tae, the chief executive of Kookmin Bank, the country's leading bank.

Analysts say the government is responsible for the consumer credit crisis. Despite warnings from analysts, it has taken a series of pump-priming measures to boost domestic spending since last year to cope with the business slowdown and tumbling exports.

Led by brisk private consumption, South Korea's economy, which contracted 5.7 percent in 1998 in the wake of the Asian financial crisis, has made a remarkable recovery with growth rates of 10.9 percent in 1999 and 8.8 percent in 2000. The economy lost steam last year with a 3.0 percent growth rate as its exports were affected by a global downturn.

Now, domestic consumption has begun to wane after the government stepped up a clampdown on rising defaults on household debt and a bubble in the property market. The government's recent decision to expand the personal debt workout program -- creditor-led debt rescheduling to salvage good-faith but problematic debtors -- may create further problems for individuals with bad credit, market watchers say.

According to the Korea Chamber of Commerce, South Korean companies expect the economy to slow in the first quarter of next year due to concerns about soaring household debt. The Bank of Korea has forecast the country will grow 5.5 percent next year after an estimated 6.5 percent rise this year.


"The government and financial institutions are urged to take strong measures to curb high consumer debt even though they risk an economic downturn," said Park Jae-ha, a research fellow at the Korea Institute of Finance.

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