South Korea's heads of finance and economy discussed dangers of high-rate loans at the meeting held last week in the presidential office, a source familiar with the matter said Thursday.

The comments hinted that the anti-trust watchdog's recent launch of probe into deposit certificate rate-rigging might come as part of efforts to lessen interest repayment burden for households.

"Growth in household loans by non-bank financial institutions was discussed at the meeting. Bi-polarization in lending rates was talked about as non-bank institutions offer loans to households with much higher lending rates than banks," a source who declined to be identified because the meeting was confidential told Xinhua.

Last Tuesday, heads of the finance ministry, the central bank and the financial watchdog met to discuss how to resolve the problem of massive household debts at the presidential office. Two days later, Bank of Korea cut its policy rate by 25 basis points to 3 percent, the first change of the rate in 13 months.

On Tuesday, Fair Trade Commission launched an investigation into local brokerages on suspicions that securities firms may collude on fixing rates for 91-day certificate of deposit (CD). The anti-trust watchdog widened Wednesday its probe into banks by confiscating records on CD issuance by major lenders.

A series of actions came as the CD rate, a benchmark for lending rates, stayed at a high level despite the drop in other market interest rates. The 91-day CD rate stayed at 3.54 percent for around four months to end-June, while the three-year Korea Treasury Bond yield dropped from 3.56 percent to 3.29 percent over the same period.

The CD rate is published by the Korea Financial Investment Association twice a day after excluding the highest and lowest rates from those offered by 10 local securities firms. Brokerages evaluate the rate, while 7 banks with the highest credit rating sell CDs to secure short-term funds.

Suspicions remained that brokerages probably quoted the rate higher with the intention of avoiding hatred from banks, which are their major customer, while lenders gave a tacit approval to it.

The higher the CD rate, the more banks will benefit from because most household loans by banks are floating-rate loans with their rates linked to the CD rate. Instead, the interest repayment burden for households grows accordingly.

As of end-September 2011, 34.8 percent of bank loans used the CD rate as a benchmark for lending rates. Loans linked to the CD rate accounted for 43.3 percent of the total lending to households, higher than 27.5 percent for corporate loans.

Meanwhile, the Financial Services Commission (FSC) said in a statement Thursday that the country's household debts are manageable for the present as its pace of growth slowed recently.

According to the FSC, South Korea's household debts grew at an average annual rate of 11.7 percent for two years through 2010, much faster than 7.3 percent growth for gross domestic product and 5.7 percent rise for disposable income.

Debt structure was vulnerable to shocks as 94.9 percent of household debts were composed of floating-rate loans as of 2010, higher than 10 percent for the United States and Germany. Bullet payment loans, which demand the repayment of all principal at maturity, accounted for 41.3 percent of total household loans in 2010, higher than 9.7 percent for the U.S. and 7.5 percent for the European Union.

Households' capability to service debts worsened. Delinquency ratio of household debts continued to rise to 0.97 percent as of end-May, the highest since 1.07 percent tallied in June 2010.

However, the FSC assessed that household debts were manageable now as the pace of debt growth slowed since the second half of last year. Outstanding household debts stood at 911.4 trillion won (800.67 billion U.S. dollars) as of the end of March, down 0.5 trillion won from three months before. It was the first decline in three years.

The regulator noted that the loss-absorbing ability of financial institutions was solid as their net profits were large enough to absorb loan-related losses, saying that a rise in the delinquency ratio was relatively slow compared with before. It added that high-income earners borrowed more money in size than low-income ones.

The FSC introduced comprehensive countermeasures against excessive household debts in the banking sector last June, but tighter rules on banks triggered the so-called balloon effect, which moved loan demand from banks to non-bank financial institutions that demand higher lending rates.

As a follow-up measure, the FSC adopted measures in late February to curb non-bank institutions' lending to households. Paradoxically, the measures were feared to push the loan demand into other money lenders that demand much higher lending rates.