The Bank of Korea has warned that the middle class, which constitutes the economic backbone of our society, could possibly collapse due to debt burden
November 1, 2013 Leave a comment
2013-11-01 16:51
Middle class on brink
The Bank of Korea has warned that the middle class, which constitutes the economic backbone of our society, could possibly collapse. According to a report on financial stability released by the central bank on Thursday, people in the middle-income pool with medium credit ratings are increasingly feeling the weight of their debt burden. This is because the financial authorities, concerned over the increasing growth of household debt in 2011 and 2012, encouraged banks and other financial institutions to tighten their lending, which resulted in those with lower credit ratings seeking out loans with higher interest from non-banking private lenders. Aside from the prolonged business slump, a sharp rise in “jeonse’’ ― which requires renters to make a lump-sum deposit for a rental space ― has also amplified the burden on middle-income debtors.As a result, those with medium credit ratings accounted for 16 percent of people who have taken out loans from private lenders at the end of 2012, a sharp rise from 13.4 percent two years ago. The number of multiple borrowers who took out loans from different institutions rose from 1.06 million in 2010 to 1.22 million this year.
Things are much worse for small business owners, many of whom are those in the middle-income class with medium credit ratings. Their average debt reaches 120 million won, triple the 40 million won owed by wage earners. Furthermore, loans borrowed by these self-employed entrepreneurs amounted to 450 trillion won as of March 31 this year, of which 37 percent or 166 trillion won was borrowed from non-banking financial institutions. More egregious is that they spend nearly 180 won out of every 1,000 won they earn repaying the principal and interest.
The financial plight of the middle class has reached a point where it can’t be left unattended any longer, raising fears that President Park Geun-hye won’t be able to deliver on her election promise of restoring the nation’s middle class.
The key to preventing the collapse of the middle class is to break out of a vicious circle in which those with lower credit ratings repay their debts with fresh loans. At least in the short term, there is a strong need to lighten their debt service burden.
Of course, the more fundamental measure is to create jobs so that people in the middle-income class can increase their earnings. Policymakers must act decisively before it’s too late.
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