By Kim Jae-kyoung
Staff Reporter
With the U.S. credit crisis expanding daily, there are rising fears that Korea may follow in the footsteps of the world's largest economy due to rising default risks of loans extended by banks to households and small enterprises. In particular, real estate project financing (PF) loans extended by savings banks to builders are emerging as a ``time bomb,'' as such loans run the high risk of becoming defaults due to the slumping property market and rising interest rates. According to the Bank of Korea (BOK), Thursday, bank loans to households reached 498.82 trillion won in July, up 25.72 trillion won from the end of last year. It was the biggest jump ever during that period. Banks' lending to households has been on the rise since January when it dropped slightly.
``The key culprit behind the rapid growth was a sharp increase in mortgages,'' a BOK official said. Home-backed loans by local banks climbed by 1.76 trillion won, or 3 percent, from June to 250.5 trillion won, the bank said. The bigger concern is rising defaults of PF loans at savings banks, which many believe could be the epicenter of Korea's potential credit crisis. If these loans become insolvent en masse, small builders will go belly up, dealing a fatal blow to the property market.
According to the Financial Supervisory Service, 106 savings banks nationwide, which closed their books in June, posted a combined net profit of 479.4 billion won in 2007, down 30.3 percent from a year ago. Default rates of their PF loans exceeded 14 percent in June. PF loans at savings banks amounted to 12.2 trillion won, accounting for 24.1 percent of their total loans, well above commercial banks' 4.4 percent. Market experts said that U.S.-type subprime mortgage crisis does not seem highly plausible in Korea at this moment, but rising defaults of PF loans are exposing the world' s 13th largest economy to a potential credit crisis.
Financial authorities have discounted these concerns, claiming the total assets of savings banks account for only 2.4 percent of the nation's total financial assets. However, experts said that Korean policymakers should remember that the U.S. credit crisis started with a sudden decline in housing prices caused by massive defaults of subprime mortgages. In its latest report, the International Monetary Fund (IMF) said that a large share of household debt is in the form of mortgages, which remain overwhelmingly on variable rates, while a quarter of mortgages are three-year bullet loans.
``This has generated concern that, following a run-up in home prices in recent years, a turnaround, or a rise in interest rates could limit the ability of households to roll over their loans or meet payment obligations,'' it said. ``If a significant number of consumers are unable to repay loans, financial institutions could also suffer as the value of collateral would likely decline, although low loan-to-value ratios provide ample room before such systemic financial risks emerge,'' it added
Source :- http://www.koreatimes.co.kr |
