Bank of Korea (BOK), South Korea's central bank, said Thursday that the country's household debts showed deeper structural weakness in 2011 as low income earners with old age increased their borrowing from non-banking financial institutions that demand higher lending rates.

According to a semi-annual Financial Stability Report submitted by the BOK to the National Assembly, household debts extended by banks grew 5.7 percent in 2011, while those by non-banking financial institutions jumped 11.6 percent. The proportion of non- banking loans stood at 39.6 percent of the total household loans as of the end of 2011, up from 38.3 percent a year earlier.

Non-banking financial institutions, including mutual credit institutions, savings banks and insurers, usually demand higher lending rates than banks, so faster growth of debts in the non- banking sector heightens risks in the household debt structure.

The faster growth in the non-banking sector was ascribable to the financial regulator's tighter rules on banks' household loans. The Financial Services Commission (FSC) introduced comprehensive countermeasures against excessive household debts in the banking sector in June last year. Household borrowers were believed to rely more on non-banking institutions as banks tightened their lending practices after the regulation.

"I believe that the regulator's action against banks' household loans influenced last year on the reduction in banks' loans and the expansion in non-banking institutions' loans to households," BOK's deputy governor Lee Kwang-june told reporters at a news conference.

The tighter rule was estimated to affect bank loans for small- and mid-sized enterprises (SMEs). According to the report, bank loans to large corporations jumped 30.3 percent in 2011 from a year before, but those to SMEs edged up 2.4 percent.

"Amid an economic slowdown, banks tend to reduce their lending to small firms rather than large companies as big firms have competitive edge and high technology that will help them overcome the slowdown. But, it is hard to identify whether the rule affected the loans to SMEs," said an official at the BOK.

The report said that default risks for SMEs were estimated to stay at a high level amid global economic downturn and fragile domestic demand, adding that audited firms with annual sales of less than 10 billion won (876,962 U.S. dollars) were especially vulnerable to the risks.

Meanwhile, low-income earners increased their borrowing, boosting worries about the structural problem of the South Korean household loans. Debts owed by people who earn less than 30 million won (26,308 U.S. dollars) annually continued to expand last year, but debts by people with an annual income of more than 30 million reduced, according to the report.

The continued increase was attributed to growing funding needs of low-income earners for daily livelihood amid deepening income bi-polarization, the report said, adding that households' capability to repay debts continued to worsen. The ratio of household debts to disposable income rose to 135.5 percent in 2011, up from 131.7 percent the previous year.

Senior citizens' debts also grew at a faster pace in 2011, serving as a potential destabilizing factor. Debts owed by people aged over 50 reached 46.4 percent of the total household debts as of end-2011, up from 33.2 percent eight years earlier. The expansion was faster than the growth rate for the proportion of the aged among total population.

More seriously, the aged relied more on non-banking financial institutions than banks for their funding needs. During the period of 2003 to 2011, the main borrowers in the non-banking sector moved to people in the 50s from those in the 40s.

The debt growth among the aged was expected to boost risks of rising sour loans as income of people aged over 50 tends to begin reducing due to retirement and so forth. The growth may act as a destabilizing factor to the housing market because seniors with low income-generating ability could sell their homes to gain the money for post-retirement livelihood, accelerating the housing market adjustment.