South Korea turns to FinTech as household debt rises to $ 1.6 trillion

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Her family business of bringing drunk people home was hit by Covid-19’s curfew and bar closure due to social distance, and Lee Young-mi * cost about 30 million won ($ 26,000). I noticed that I was managing my personal debt.

A 56-year-old woman living in Suncheon, South Korea, was already struggling to repay or refinance her four credit cards, but faced the prospect of a rapid increase in these debts after her husband was diagnosed with cancer. doing.

“Not many people drank late into the night, so they had little income for over a year,” Lee said. “Now my husband will not be able to work at all for the next three months after his surgery.”

Lee’s story has spread to Asia’s fourth-largest economy as a whole, with self-employed people, who make up nearly one-third of the workforce, suffering sharp declines in income due to coronavirus restrictions. Today, Seoul has struggled for years to curb household debt, which reached a record 1,765 trillion won ($ 1.6 trillion) in March, after Fintech Companies and peer-to-peer lenders seeking answers.

Among them is the People Fund, which sells technology-based investment products backed by machine learning. This allows borrowers to refinance high-interest loans from banks and credit card companies.

Since its inception in 2015, the company has lent at least $ 1 billion to more than 7,500 customers. The product allows the borrower to switch debt to a fixed-rate amortization loan with an annual interest rate of approximately 11%, which is a change from the high-risk one. Floating rate, interest-only loans common in Korea.

PeopleFund has received approximately 96.7 billion won from securities firm CLSA and, along with Lendit and 8Percent, is one of the country’s 250 shadow banks to obtain a peer-to-peer loan license.

“The most serious household debt problem in the country lies in unsecured non-bank loans that are too expensive. People Fund CEO Joey Kim told the Financial Times.

The surge in digital lenders and fintech in South Korea, where high-risk borrowers are often cut off from bank lending, is being encouraged by the national government.

“We hope that P2P lenders will help solve the dichotomy of the credit market by increasing access to mid-interest loans for low-income earners,” said a Financial Supervisory Service official.

South Korea’s household debt situation has become even more pressing since the outbreak of the pandemic, with increased mortgage borrowing, stagnant wage coverage, and investment investments. Fast-growing stock market.. Korean households have the highest debt in the world, with an average debt of 171.5 percent of their annual income.

The ratio of household debt to GDP in South Korea was 103.8% at the end of last year, compared to the average of 62.1% in 43 countries surveyed by the Bank for International Settlements.

Many of the new debts were dangerous. According to the Bank of Korea, unsecured mortgages from non-bank financial institutions amounted to 116.9 trillion won as of March, up 33% from four years ago, most of which are high-interest loans from poor borrowers.

Overcoming problems has become a national importance. In a rare warning in June, the central bank said the combination of high asset prices and excessive borrowing risks causing market sellouts and rapid debt de-leveraging.

“If the fiscal imbalance further widens, it could worsen the outlook for medium- to long-term economic growth,” said Lee Ju-yeol, president in July.

However, national economic planners are struggling to contain debt-fueled asset bubbles without compromising South Korea’s asset bubble. Vulnerable economic recovery..

The government has attempted to address the danger by tightening lending rules. In July, regulators lowered the country’s maximum statutory interest rate, which private lenders can charge customers, from 24% to 20%.

Economists have warned that rising debt levels will make South Korea more vulnerable to economic shocks.

They also warn that if BoK rolls back the expected monetary easing in the fourth quarter, the quality of financial institutions’ assets could be hit by a surge in non-performing loans.

“We need to tighten monetary policy to curb the asset bubble, which will increase household debt and further curb consumption,” said Park Chung-hoon, head of research at Standard Chartered Bank in Seoul. rice field. “The government is facing a dilemma.”

But for Lee Young-mi, the 11 percent rate offered by the People Fund is still too high. “I don’t know how to repay my debt.”

* Renamed

South Korea turns to FinTech as household debt rises to $ 1.6 trillion

Source link South Korea turns to FinTech as household debt rises to $ 1.6 trillion

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