SEOUL-- Park Mi-seon, a 46-year-old mother of two who runs a coffee shop franchise, took out 200 million won (US$176,444) in bank loans in 2014 when she opened her business in a suburb of Seoul.
At that time, the lending rate was 4 percent per annum. But, the rate went up to 4.5 percent last month as market interest rates crept up.
Discouraged by rising market interest rates and intensifying competition from coffee shop franchises, Park said she is seriously considering closing her cafe if the rate rises again.
"With coffee shops mushrooming everywhere, monthly revenues have fallen by a third," Park said. "Under the current circumstances, a slight rise in interest payments is very burdensome."
Market watchers say people like Park are not uncommon.
Although the Bank of Korea (BOK) kept its key interest rate at the record low of 1.25 percent for a 13th consecutive month, market interest rates have moved up steadily.
The rise of market interest rates was attributed to a rise in COFIX, a benchmark lending rate for mortgage loans, on expectations of a U.S. interest rate hike later this year.
According to the data by the Korea Federation of Banks, the COFIX rate rose 0.01 percentage point to 1.48 percent in June, marking gains for the second straight month.
Annual mortgage rates charged by KB Kookmin Bank, the nation's top retail lender, rose to as high as 4.35 percent last month from 4.30 percent.
Shinhan Bank also raised its annual mortgage rates to upwards of 4.14 percent last month from 4.13 percent.
The gap in key interest rates between South Korea and the United States is likely to be reversed if the Federal Reserve raises interest rates to a range of 1.25 percent to 1.5 percent by the end of this year.
Shin Yoo-ran, a researcher at Hyundai Research Institute, said, "Because the market always applies interest rates in advance, lending rates rise on expectations of a rate adjustment."
Data by the Bank of Korea showed that the total value of loans provided to self-employed people like Park were estimated at 480.2 trillion won at the end of last year.
Nam Yoon-mi, a researcher at the central bank, said in a research note that even a slight rise in interest rates would heighten the risk of closures for small merchants.
The risk of closures for the retail and services sectors would rise about 7 percent if lending rates gain 0.01 percentage point. For the food and accommodations sectors, the adjustment can translate into a 10.6 percent spike in closures, according to Nam.
As for the snowballing of household debt, which neared about 1,400 trillion won, a rise in interest rates will have a major impact on household debt-servicing capacity.
The central bank data showed about 75 percent of household debt is with the floating rate or non-amortizing structures. If interest rates rise 0.05 percent, about 33,000 homes will be at risk of default, it said.
Kim Ji-seop, an economics professor at Yonsei University in Seoul, said the government needs to step up efforts to transform the structure of household loans to fixed-rate loans.
"If lending rates go up, the risk of contagion to second-tier banks could rise as the possibility of default from low-income people grows," Kim said.
Last month, the Financial Service Commission said it will require second-tier banks to set aside more loan-loss provisions from the second quarter of this year in a move to curb high-risk home lending.
For savings banks that make loans worth 10 million won (US$8,883) with an annual interest rate of over 20 percent, current regulations require the bank to set aside 20 percent of the loans as a loan-loss provision, or 2 million won.
The tougher regulation will require their financial institutions to additionally set aside 50 percent of the loan-loss provision, or 1 million won, according to the financial regulator.
Shin Jin-chang, an official at the commission, said the tougher rule is expected to let second-tier banks tighten guidelines for high-risk home lending.
Still, a majority of analysts expect the BOK to hold its key rate steady by the end of this year.
The central bank also played down concerns that inflation may accelerate along with an economic recovery as it leaves interest rates at a record low for an extended period.
Last week, the central bank's board of monetary policy said it "will conduct monetary policy so as to ensure that the recovery of economic growth continues and consumer price inflation can be stabilized at the target level over the medium-term horizon."
"As the inflationary pressures on the demand side are not expected to be high despite the domestic economy expected to show solid growth, the board will maintain its stance of monetary policy accommodation," it said.
Source: Yonhap News Agency