SEOUL: South Korea's central bank head on Friday issued a fresh warning over the country's growing mountain of personal debt, a day after local banks suspended most loans to individuals.
"The volume of household debt is too large and it's right to move in the direction of reducing it," Bank of Korea (BoK) Governor Kim Choong-Soo told journalists.
His remarks came a day after local banks temporarily suspended the extension of fresh personal loans and mortgages, yielding to pressure from the country's financial watchdog.
Alarmed by the threat of possible punishment from monetary authorities, South Korean banks stopped not only loans for houses but other credit lines, including loans guaranteed against financial assets and credit cards.
The suspension prompted concerns that borrowers would turn to second-tier financial institutions or third-tier lenders who charge rapacious interest rates.
The Financial Services Commission (FSC) last week summoned vice presidents of local banks and issued "verbal" advice telling them to rein in galloping household debt or face "intense" inspections, an FSC spokesman said Friday.
"They were asked to readjust the pace of loans as the rate at which household debt grew last month was excessive," the spokesman told AFP.
"Such loans are often used for speculative investment, such as stocks, rather than buying houses or paying rent," he said.
The central bank warned in April that if left unchecked, the country's household debt, which stood at 612.3 trillion won ($565 billion) as of the end of May, could undermine financial stability in a country whose GDP in 2010 stood at 1.014 trillion dollars.
Debt levels last month increased 4.3 trillion won and rose a further 2.2 trillion won in the first half of this month, according to Yonhap news agency.
But economists have warned a sudden halt to household loans could deliver a shock to the country's struggling economy, especially to the already-suffering real estate market.
Copyright AFP (Agence France-Presse), 2011
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