Lending to vulnerable households and consumption: evidence from Korea
Summary
Focus
Since the Great Financial Crisis of 2007–08, household indebtedness has reached very high levels in many countries, but this has not generated significant financial instability. Instead, many countries have witnessed weak consumption and GDP growth. We aim to understand what causes Korean household borrowers to become financially distressed, whether financial institutions continue to extend loans to vulnerable borrowers, and what impact vulnerable household borrowers have on consumption growth in Korea in the short and medium run.
Contribution
Using a large cross-section quarterly panel of household borrower-level data in Korea in 2017–23, we classify vulnerable borrowers into two groups: delinquent borrowers with debt repayments overdue by more than 30 days, and borrowers whose debt service ratio exceeds 50% yet they avoid delinquency ("zombie borrowers"). We investigate how persistent the zombie or delinquent status is, what aspects of borrowers make them vulnerable, and how vulnerable borrowers' consumption changes. In doing so, we use dummy variables for zombie and delinquent borrowers and also conduct an event-study type analysis.
Findings
First, zombie borrowers, which comprise around 15% of total indebted households in Korea, persist over time and rarely switch to delinquency. They hold large amounts of mortgages and other secured loans and are asset rich. Second, we find evidence of evergreening of loans to zombie borrowers driven by non-banks. Third, zombie borrowers experience slower consumption growth than normal borrowers, while delinquent borrowers' consumption growth is slower over two years but recovers in three years. Fourth, when interest rates increase, vulnerable borrowers' consumption is more negatively affected than that of normal borrowers. Finally, when the share of zombie borrowers in a city increases, the city's consumption growth declines significantly. These results indicate that zombie borrowers have a substantial negative impact on aggregate consumption in Korea.
Abstract
Using a large quarterly consumer credit panel dataset from Korea covering 2017–2023, we present four key findings on the characteristics, lending sources, and macroeconomic consequences of vulnerable borrowers-namely, delinquent borrowers whose debt repayment is overdue at least 30 days, and borrowers whose debt service ratio is higher than 50% but who are not delinquent ("zombie borrowers"). First, zombie borrowers persist over time and rarely switch to delinquency, and hold large amounts of mortgage and other secured loans and thus are asset-rich. Second, we find evidence of continued extension and rollover of loans ("evergreening") to zombie households driven by non-banks. Third, zombie borrowers experience slower consumption growth over three years than normal borrowers, while delinquent borrowers' consumption growth is slower over two years but recovers in three years. Moreover, when interest rates increase, vulnerable borrowers' consumption is more negatively affected than that of normal borrowers. Finally, when the share of zombie borrowers increases in a city, the city's consumption growth significantly declines, driven by low-income and young borrowers. Given that zombie borrowers have a substantial impact on aggregate consumption dynamics in Korea, it is important to introduce stringent and comprehensive regulation on the debt service ratio applied to all types of financial institutions, and design debt relief programs which balance mitigating consumption slowdown and reducing moral hazard.
JEL Classification: E12, G51
Keywords: bank, consumption, debt service ratio, delinquency, household debt, non-bank financial institution, zombie borrower
