40 Percent of Korean Households Unable to Pay Back their Debts

It was reported that 40 percent of Korean households are unable to pay back their debts.

Boston Consulting Group (BCG), an international consulting group, provided the report “Current Condition of Household Financial Debts Repayment Capacity” to Korean banks on November 6, which is analyzing the debts per household, property, and provisional disposition income according to the National Statistical Office’s June data report.

BCG has concluded that the lowest four categories out of the ten categories of households (divided based on the standards of their yearly provisional disposition income) cannot repay their debts even with their financial properties and yearly provisional disposition added together.

The lowest category households with the least financial properties and provisional disposition income owe about 19 million won per household, but their financial household counts 2.2 million won and their provisional disposition income is nil, which makes the debt rate compared to financial properties and provisional disposition income as 851 percent. In addition, the second lowest category households owe 18.3 million won per household with financial properties of 2.8 million won and provisional disposition income of 7.3 million won, making their debt rate as 180 percent. The third and the fourth lowest category households have debt rates at 115 percent and 101 percent respectively.

On the contrary, the highest three categories have debt rates around 10-53 percent, which is a manageable level compared to their financial properties and provisional disposition income. When analyzing all categories on their financial properties and provisional disposition income, the debt rate is 33 percent.

In particular, BCG stated, “The interest cost of the lowest four categories exceeds the 20 percent of their provisional disposition income, so excluding the living costs, they are fundamentally in a difficult situation to repay their debts.”

An account from the banks that requested the report from BCG said, “The result that 40 percent of the whole households are under a default situation is showing that the household credit is in an uncontrollable peril. Considering the situation, it is difficult to resolve this problem of household insolvency in a short period of time.”

Related to the issue, Director of the Bank of Korea Cho Go-jun, explained, “It is true that the household credit is in a serious condition, but the tendency has somewhat alleviated recently, and with the economic improvement, the situation will get better.”

Joong-Hyun Park sanjuck@donga.com