Bank for International Settlements publishes working paper finding non-banks evergreen loans to Korean zombie households and consumption slows

The Bank for International Settlements published a working paper analysing how lending to financially vulnerable households in Korea affects consumption. Using borrower-level panel data for 2017–2023, the paper distinguishes between delinquent borrowers (payments overdue by more than 30 days) and “zombie borrowers” with high debt service ratios (DSR above 50%) who remain current, and finds that zombie borrowing is persistent, linked to continued credit extension by non-banks, and associated with weaker consumption growth, especially when interest rates rise. Zombie borrowers are characterised as asset-rich, holding large shares of mortgages and other secured loans, while delinquent borrowers rely mainly on consumer credit and show a higher probability of returning to normal status over time. Event-study and regression evidence indicates that loan amounts tend to rise in the year after borrowers become zombies, with the paper attributing evergreen-like dynamics primarily to non-bank financial institutions, particularly other non-bank institutions, as zombie borrowers’ shares of bank and non-bank depository lending fall. On consumption, zombie borrowers show persistently slower growth over one to three years, whereas delinquent borrowers’ consumption falls sharply in the short run but recovers by around three years; the negative consumption response to policy rate increases is stronger for vulnerable borrowers, and zombie households display limited responsiveness to house price gains. At the city level, a higher share of zombie borrowers is linked to significantly lower future consumption growth, with larger effects where zombie prevalence is higher among low-income and younger borrowers.