· Loans from private lenders increased 2.6%: surge in rent also a factor

The amount of household debt owed by the middle class and private business owners is growing to dangerous levels. More middle class households are borrowing money from private lenders at a high interest as an adverse effect to rising rent prices and to government measures aiming to control household debt. Unlike the government's policy slogan, "We will create a large middle class," the family finances of the middle class and self-employed are suffering.

According to the "Financial Stability Report," which the Bank of Korea submitted to the National Assembly on October 31, the percentage of loans taken out from private lenders by those categorized as the middle class according to their credit rating (levels 5-6 in a 10-tier credit rating system) increased from 13.4% in 2010 to 16.0% last year. However, during the same period, the percentage of middle class households--thus defined according to their credit ratings--using mutual banks such as individual agricultural cooperatives fell from 37.5% to 29.1%.

This means that those who fall in the middle tier according to their credit ratings are being pushed away from established financial institutions and are taking out loans elsewhere.
The Bank of Korea thinks that such a phenomenon emerged because financial institutes embarked on recovering their loans in order to manage risk after the government introduced measures to suppress household debt in 2011.

When looking at the number of loans per person by each class, those with poor credit ratings managed to decrease the number of their loans from 2.6 in 2010 to 2.5 at the end of June this year, but those with credit ratings in the middle tier took out a larger number of debts from 1.9 to 2.1 during the same period.

The soaring rent prices also landed a direct hit on the middle class. Secured loans and credit loans taken out by households in the third income quintile (middle income households) respectively accounted for 7.1% and 13.6% of overall discrete loans, the highest among all income quintiles. Rent is steadily taking a larger portion of the disposable income of the third and fourth quintile.
In particular, most private business owners belonged to the middle income, middle credit rating class, and the middle class business owners faced the toughest challenges. The proportion of principal and interest repayment in the ordinary income of private business owners in the third income quintile was 18.2% at the end of last year, more than 1.5 times that of the average of wage workers. Loans per capita owed by private business owners was 120 million won on average at the end of March, almost three-fold the loan per capita of wage workers (40 million won).

Risks in the financial structure of companies appear to be spreading from small and medium-sized businesses to large companies. Among large companies with debt ratios (the ratio of debt to equity capital) exceeding 200%, 55% recorded deficits in the first half of this year.
The Bank of Korea said, "The increase in housing costs due to rising rent prices have worsened the household income and expenditures of the middle class according to their income and credit rating, and has led to sluggish consumer spending."