July 16, 2015 / 8:42 AM / 4 years ago

Unable to curb household debt, S.Korea puts focus on loan quality

SEOUL, July 16 (Reuters) - South Korea’s government has effectively abandoned its goal to cut one of the world’s highest levels of household debt, and will instead try to curb riskier types of loans as a weak economy forces it to focus on growth, officials told Reuters.

But with the average household already spending more than one-third of disposable income on repayments and the sector’s debts reaching $1 trillion, the government risks creating a bigger drag on economic growth once interest rates rise again.

Steps likely to be announced next week are aimed at cutting the share of “bullet” loans - where a lump sum is repayable at maturity - and will require lenders to strengthen screening of applications, one government source said.

In February last year, President Park Geun-hye said she aimed to cut the household debt to disposable income ratio to 155 percent by the end of 2017 from 160 percent at the end of 2013.

But months later, the government eased mortgage restrictions and the central bank cut interest rates, and the ratio jumped to 164 percent at the end of last year. In comparison, the ratio reached 140 percent in the United States in 2007, just before that country’s housing bubble burst.

The original goal is no longer possible nor desirable, as reviving growth takes precedence, another official said.

“We are not saying it’s not a grave issue, but what we are trying to do is remove detonators one by one so that the debt quality remains solid,” he said.

Both officials spoke on condition of anonymity as they were not authorised to discuss the planned measures.

The household debt ratio looks to be headed higher as the broadest measure of household debt grew 6.8 percent in the first quarter from a year earlier, far outpacing a 3.6 percent gain in disposable income.

“It’s natural for debt to grow as interest rates are being lowered, but the problem is that debt is growing too fast when economic growth remains low,” said Nomura economist Young Sun Kwon.

The central bank, which had previously said rapid growth in household debt constrained room for aggressive policy easing, has nonetheless since last year cut interest rates four times by a total of one percentage point.

Until as recently as 2010, almost all mortgage loans required borrowers to pay only interest until maturity, when the principal became due.

The ratio has since dropped to 73.5 percent by the end of 2014 and the government has aiming to bring it down to 60 percent by the end of 2017. The sources said the planned measures would include sharply lowering this target.

Editing by Tony Munroe and Simon Cameron-Moore

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