Rising Korean household debt could stymie growth

Household debt has climbed to 164% of disposable income and is at a higher level than when the US was entering its subprime crisis.

The main source of runaway credit are nonbanks, which are more lightly regulated and tend to lend to low income households, according to RBS in a research report. This has led to overall credit outpacing nominal GDP even as several credit institutions have succeeded in enacting prudential lending measures.

RBS notes that third parties like pension funds and insurance companies also act as lenders when banks and nonbanks curtail credit due to "pesistently low interest rates." But the precarious credit scenario could spiral out of control fast, and could impact the nation's growth.

"At current growth, interest, and saving rates households' debt-to-income ratio should fall by 1 percentage point in 2012. The European debt crisis poses marked risks to this scenario," said RBS. "Household delinquency rates are on the rise, approaching levels last seen in the wake of the Lehman crisis."

"The financial sector is likely to withstand a deterioration of credit quality, given a strong capital base. Also, questionable institutions account for a small part of financial sector assets. The key risks are to growth, which is increasingly driven by domestic demand and household consumption," RBS added.