S. Korea must tackle huge household debts: watchdog

South Korea must act to curb household debts totalling hundreds of billions of dollars that pose a downside risk to the economy, the top financial watchdog said Wednesday.

"It's imperative that we take pre-emptive countermeasures against the household debt problem to assure a soft landing as it poses a great risk to our growth," Financial Supervisory Service governor Kwon Hyouk-Se told a seminar.

Household debt stood at 857.8 trillion won ($756 billion) at the end of March.

While the growth rate had eased somewhat, the structure of the debts had worsened, Kwon said, with borrowers turning to non-bank lenders that charge higher interest rates.

He called on financial companies to increase the number of fixed-rate mortgages and allow repayments through instalments rather than lump-sum payback.

Debts of borrowers with low credit ratings should be rescheduled.

Kwon's comments suggest authorities are increasingly worried over such debts amid a global economic slowdown and a sluggish domestic property market.

Many South Korean households rely on debts to buy a house and pay only the interest every month, paying back the principal when they sell the house.

But a weak property market often means they cannot make enough to pay back the principal when the loan falls due.

The pace of the rise in the debt has been slowing in recent months as financial authorities discourage banks from lending, but this often pushes poorer borrowers to other lenders.

Moody's Investors Service said last month household loans have grown "at an alarming rate" and are vulnerable to financial shocks arising from the global economic downturn.

More people are borrowing just to meet living expenses and there is an increase in borrowers from the older age group and lower income group, it said.

-- Dow Jones Newswires contributed to this report --

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