South Korean individuals and companies owed 712.95 trillion won ($600 billion) from non-banking institutions as of October, up 2.1 percent from the previous month, quickly accelerating as Koreans rush to secure loans at cheaper rates before interest rates go higher on concerns for faster-than-expected tightening in the United States.

The explosion of the private-sector debt levels could become a reality next year and pose as a crisis for the fragile economy whose prospects for next year are dimmer amid political insecurity on top of sluggish exports and domestic demand as 90 trillion won worth corporate bonds and mortgage-backed loans are due next year.

According to data released by the Bank of Korea on Sunday, loans from non-banking sector picked up from February after financial authorities required banks to tighten guidelines on extending new mortgage-backed loans to curb the growth in household debt. Loans taken out from non-banking sector had passed a milestone of 600 trillion won in March last year.

Moreover, households and companies are in a hurry to secure as much funds as possible before they become expensive for refinancing on existing debt. Corporate bonds due by next year total 43.59 trillion won and mortgage-backed loans maturing next year also amount to 46.5 trillion won.

Mortgage lending rates by banks have been rising fast as they are connected to the market yields.

The rate on Shinhan Bank’s Cost of Funds Index (COFIX)-tied floating mortgage loans added 0.36 percentage point to a range of 3.26 ~ 4.56 percent on December 16 from 2.90 ~ 4.20 percent as of the end of October. During the same time, KB Kookmin Bank raised the lowest interest rate range from 2.70 ~ 4.01 percent to 2.96 ~ 4.27 percent. Given that ordinary customers take out loans with 0.2 to 0.3 percentage point higher rate than the bottom rate, the average mortgage would charge interest of around mid-3 percent.

The rate on floating-rate mortgage loans by the country’s four major commercial lenders - KB Kookmin Bank, Shinhan Bank, KEB Hana Bank and Woori Bank - came at 3.07 percent to 4.17 percent as of December 16. Market experts believe that it would exceed 4 percent within the first quarter of next year.

Long-term bond yields have decoupled from the central bank’s policy rate of 1.25 percent to follow the jump in bond yields of U.S. treasuries in the wake of the victory of Donald Trump promising of aggressive fiscal spending in the U.S presidential election in November and rate hike from the U.S. Federal Reserve which also promised of three quarter-point additional increases in short-term interest rates next year.

By Park Joon-hyung

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