South Korea's household debt is potentially detrimental to the local bank industry, but the risks are expected to fizzle out in line with policy efforts aimed at improving the quality of such liabilities, a Standard & Poor's official said Thursday.

"It's a threat, but we also see mitigation. The household debt level increased sharply this year. (But) we saw the government put out measures to slow it down and help banks to change the structure of mortgage loans," said Ryan Tsang, an analytical manager at the global credit appraiser.

Tsang stressed "these efforts will continue to help," citing other factors that are forecast to ease household debt risk, such as the relatively low loan-to-value ratio and households' financial assets that are bigger than their debt.

Household debt growth in Asia's fourth-largest economy has accelerated in the past year following the Bank of Korea's four rate cuts that sent the key interest rate to a record low of 1.5 percent.

Fears over rapid household debt growth have recently spiked as the U.S. Federal Reserve readies to deliver its first rate hike in nearly a decade, a move which will likely increase borrowers' financial burden.

In efforts to rein in household debt growth and allay financial risks, the government in July announced policy measures that encourage borrowers to take out fixed-rate and long-term loans over floating-rate and short-term loans. The government also tightened the screening of borrowers' repayment abilities.

Officials at Standard & Poor's, meanwhile, estimate that a U.S. rate hike would have a limited impact on South Korea.

"Since a lot of people are expecting the move, as long as it happens in a gradual manner, it is unlikely to lead to a sharp outflow of funds or funding and refinancing risks," said Kwon Jae-min, head of analytics in Asia-Pacific.

Tsang supported the view, saying a rapid outflow of funds seen in 2008 is unlikely, citing local lenders' improved foreign funding position.

"The pressure on financial institutions under a stressful scenario is probably going to be less than what happened in 2008." (Yonhap)