Can South Korea prevent massive loan defaults?



In an effort to curb soaring household debt that the government says may cause financial instability, South Korea has asked banks to tighten screening of applications for home mortgages from March.

Banks need to strengthen their evaluation of whether mortgage applicants will be able to meet their payments, the Financial Supervisory Service said in an e-mailed statement. Mortgages are currently based solely on collateral.

The Bank of Korea in November ordered banks to set aside more reserves to help reduce lending. Central Bank Governor Lee Seong Tae and Finance Minister Kwon Okyu have warned surging household debt raises the risk of loan defaults that might undermine South Korea's $788 billion economy.

South Korea's household debt as a share of gross domestic product rose to 67 percent in the third quarter of 2006, from about 64 percent a year earlier, according to figures from Lehman Brothers.

Is there really a cause for concern? What are the chances of a massive loan default happening?

Let us know what you think.