Korean Job Discussion Forums

[Who's Your Daddy?]

This is the elephant in the room: Korea's household debt.

http://find.joinsmsn.com/search_link.asp?total_id=4843411

FSS to rein in grace periods

Move is an attempt to stem ballooning household loans
December 27, 2010
The Korean government will put the breaks on the local financial practice of repeatedly extending grace periods for household loans, according to the nation�s financial watchdog agency.

On Friday, the Financial Supervisory Service (FSS) said that it plans to direct local banks to refrain from this widespread custom in order to put a lid on ballooning household loans.

This is just the latest move in the government�s broad policy strategy focused on curtailing the accelerated increase of household debt and improving the financial structure of common households.

However, some experts worry that the policy covering grace periods will suddenly aggravate the public�s debt burden and lead to defaults as well as crush a fledgling revival of the real estate market.

Local banks have commonly offered mortgage loans with a grace period of three to five years and 20 to 30 years of amortization. During the grace period, borrowers must make interest payments but are not obligated to pay down the principal.

Banks, however, have been repeatedly extending these grace periods, making it easy for consumers to borrow beyond their means and therefore increasing the risk of defaults.

The FSS plans to direct banks to refrain from re-extending grace periods that expire in the future, recommend loan products without built-in grace periods and voluntarily shorten grace periods. It is expected to issue directions in the first quarter of next year at the latest.

Regulators say that although household loans and, in extension, household debts aren�t an immediate problem, it could become so in the future.

�In a macroeconomic perspective, the household debt problem is not systematic - personal debt has reached 900 trillion won ($782.1 billion) but personal assets are at 1,200 trillion,� said Chin Dong-soo, the chairman of Financial Services Commission (FSC) recently.

�What is worrying is the speed of increases in household debt and its main factor, mortgage loans. ... It could become a bigger burden should the interest rate rise.�

In fact, Korea�s ratio of household loans to disposable income is higher than many advanced nations at 153 percent as of 2009. At the same time, Japan logged 135 percent, the U.S. had 128 percent and Germany came in at 98 percent.

Moreover, variable rates take up a whopping 93 percent of the loans, while 43 percent are structured for the principal to be repaid all at once on maturity - leaving Korea�s household loans vulnerable to increases in interest rates.


By Lee Jung-yoon [[email protected]]

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And the statement of Chin Dong-soo (chairman of Financial Services Commission) seems stupid. Isn't it predicated on the idea that the value of the assets (house prices) can't drop. Tell than to the US, UK, Spain, Japan, etc.

There's a big problem here.

[AmericanBornKorean]

Great. Time to tell the pops to be wary of equity investments in banks.