Household debt is tall task for Moon

President Moon Jae-in and his key economic advisers will draw up a comprehensive measure to tackle the country’s soaring household debt this week.

The President urged his advisers to take this issue seriously last week when the Bank of Korea (BOK) reported that the debt reached nearly 1,360 trillion won in March, up 1.3 percent from December last year, a record high since the country began compiling the data in 2002.

“We need to discuss ways to reduce the household debt,” he told his advisers last Thursday, as it negatively affects the livelihoods of low-income earners.

Kim Jin-pyo, the head of the president’s policy planning panel, also expressed concern over the debt, while criticizing the former government’s debt mismanagement.

President Moon pledged during his campaign to bring the debt down to below 150 percent of disposable income by expanding the credit evaluation metric system of debt-service ratio (DSR) and creating jobs.

Currently, the debt to disposal income ratio stands at over 170 percent, well above the OECD average of about 130 percent.

There are more than 1.8 million households that cannot pay back their debt. This is considered a more serious problem than when subprime mortgages dealt a blow to the U.S., Moon’s camp noted.

The DSR measures whether borrowers can pay back principal and interest on all their loans they have taken out in time, in accordance with their annual income. DSR is considered stricter than debt-to-income ratio.

Caused by a series of housing deregulations and interest rate cuts by the former government, the debt-led growth has created a vicious economic cycle of low private consumption, investment, employment and income.

President Moon seeks growth driven by an increase in laborers’ income and welfare, which would improve private consumption and investment.

His labor policy included increasing the minimum wage to 10,000 won an hour, reducing the number of irregular workers in the public sector to zero and creating 810,000 public jobs.

At the same time, lowering the debt to a level close to the OECD average would be important to sustain the economy.

Commercial banks here are expected to adopt the DSR with KB Kookmin Bank leading its implementation.

KB Kookmin has begun using the DSR, which "comprehensively examines individuals’ loan history and portfolio including their credit card debt, mortgages and repayment capability before extending credit,” it said.

Other banks are said to be forming a team to follow suit in applying the DSR.