Korea Economic Update
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Due to the Covid-19 curfew and social distancing, after her family business’s business of transporting drunken people home was hit by the closure of the bar, Lee Young-mi* found herself carrying about 30 million won (US$26,000) in personal debt.
The 56-year-old Suncheon resident of South Korea is already working hard to repay or refinance four credit cards, but now that her husband is diagnosed with cancer, these debts will rapidly increase exponentially.
“For more than a year, we have almost no income because very few people go out to drink until late at night,” Li said. “Now my husband can’t work at all for three months after the operation.”
Li’s story is being played out in Asia’s fourth-largest economy, as the income of self-employed individuals, who account for nearly one-third of the workforce, has fallen sharply due to coronavirus restrictions.Now, after years of hard work to control the 176.5 billion won (1.6 tons) of household debt in March, Seoul hopes Fintech Companies and P2P lenders seek answers.
These include PeopleFund, which touts technology-based investment products powered by machine learning, allowing borrowers to refinance high-interest loans from banks and credit card companies.
Since its establishment in 2015, the company has provided at least $1 billion in loans to more than 7,500 customers. Its product allows borrowers to convert debt into fixed-rate amortization loans with an annual interest rate of approximately 11%, which is common in South Korea from risky floating-rate, interest-only loans.
PeopleFund has received approximately 96.7 billion won in financing from the brokerage firm CLSA. Together with Lendit and 8Percent, PeopleFund became one of the first of the country’s 250 shadow banks to obtain a P2P loan license.
“The country’s most serious household debt problem is unsecured non-bank loans, which are overpriced. We can provide more affordable loans to ordinary people who cannot get bank loans,” PeopleFund CEO Joey King told British “Financial Times”.
The South Korean government encourages digital lenders and financial technology companies to proliferate in South Korea, and high-risk borrowers often fail to obtain bank financing.
“We hope that P2P lending institutions can help resolve the dichotomy of the credit market by increasing the opportunities for low-income people to obtain middle-rate loans,” said an official from the Financial Regulatory Authority.
Since the beginning of the pandemic, South Korea’s household debt situation has become more urgent, and mortgage loans have increased to pay stagnant wages and invest in Booming stock marketKorean households are among the most indebted families in the world, with average debt equivalent to 171.5% of annual income.
At the end of last year, the ratio of household debt to GDP in South Korea was 103.8%, while the average of the 43 countries surveyed by the Bank for International Settlements was 62.1%.
Most new debt is risky. According to data from the Bank of Korea, as of March, unsecured household loans from non-bank financial institutions were 11.69 billion won, an increase of 33% from four years ago, most of which were high-interest loans provided by poor borrowers.
Solving this problem is of national importance. In a rare warning in June, the central bank stated that the combination of high asset prices and excessive borrowing could trigger market selling and rapid debt deleveraging.
“If financial imbalances intensify further, this may weaken our mid- to long-term economic growth prospects,” the Bank of Korea Governor Lee Joo Yeol said in July.
However, the country’s economic planners are working hard to curb debt-driven asset bubbles without harming South Korea’s economy. Fragile economic recovery.
The government tried to resolve this danger by tightening lending rules. In July, the regulator reduced the maximum legal interest rate that private lending institutions can charge customers from 24% to 20%.
Economists warn that rising debt levels have increased South Korea’s vulnerability to economic shocks.
They also warned that if the Bank of Japan cancels its monetary easing policy in the fourth quarter, the surge in non-performing loans may hit the asset quality of financial institutions.
“Currency tightening is needed to curb asset bubbles, but this will increase household debt burdens and further curb consumption,” said Park Chong-hoon, head of research at Standard Chartered Bank in Seoul. “The government is facing a dilemma.”
However, for Li Yingmei, the 11% interest rate offered by PeopleFund is still too high. “I don’t know how to repay the debt.”
*Name has been changed