Lending to vulnerable households and consumption: evidence from Korea

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.