Aju Business Daily

The Bank of Korea is wary of the worsening fiscal health of the country’s household sector as household debt soars on increased activity in the housing market.

The central bank, however, sees little chance that the economy will see massive mortgage default anytime soon.

In a biannual report on the financial stability, the bank said on Tuesday that the fiscal health of the country's household sector has worsened as debt growth outpaced income growth in the second half of the year.

“There is s a need to continuously be wary of households' financial stability," the report said

“if macroeconomic shocks occur including sudden interest rate increases, there is a chance insolvent households may surface, the report said.

But the report denied the economy faces a risk of households defaulting anytime soon

Many households have taken out loans to cover rising housing costs and living expenses while their income has stagnated amid the prolonged economic slump.

Some economists have warned that a rise in interest rates will lead to massive household default.

On Monday, results of an official survey showed South Korean households spent more of their disposable income on repaying debts in 2014 than the previous year, underscoring the heavy debt burdens of households dragging on private consumption.

The debt service ratio -- a key gauge determining the financial soundness of households represented as the percentage of disposable income used to repay interest and principal -- rose to a record 24.2 percent this year from 21.7 percent in 2013.

Seven out of 10 households are having difficulties making ends meet due to their debt obligations.

It was based on a survey of 20,000 households across the country that the Korea Statistics agency conducted jointly with the Bank of Korea and the Financial Supervisory Service.

The Korean government has been pushing for a restructuring of household loan structures, which typically carried long grace periods. Following the government's initiative, local banks devised earlier this month new lending guidelines to strictly check borrowers' repayment abilities based on their income and grant shorter loan periods.

By Alex Lee
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