Debt held by South Korea’s self-employed is nearing a breaking point and is emerging as a broader financial risk as more borrowers are pushed out of banks and into higher-cost nonbank lenders. As bank lending standards tighten, delinquencies and business closures are rising in tandem, reinforcing a negative cycle.
According to Korea Credit Data on April 13, outstanding loans to sole proprietors totaled 729.2 trillion won at the end of last year, up 13.2 trillion won from a year earlier (716 trillion won). Bank lending stayed around 433 trillion won over the year, but nonbank loans rose 14 trillion won, to 296 trillion won from 282 trillion won, lifting the overall total.
Mutual finance institutions, often cited as a blind spot in household loan oversight, also led nonbank lending to sole proprietors, accounting for 32.1% of the total. These second-tier lenders, including mutual finance, typically charge higher interest rates than banks but apply looser screening, making it easier for vulnerable borrowers to enter.
That also means credit problems can spread faster. Bank delinquency rates were managed at about 0.6%, but savings banks’ delinquency rate rose to 5.4% at the end of 2025 from 5.0% at the end of 2024. Mutual finance institutions’ delinquency rate increased to 2.9% from 2.7% over the same period.
By amount, delinquent loans at banks remained at 2.4 trillion won, while nonbank delinquent loans jumped 17.9% to 10.5 trillion won from 8.9 trillion won. In a period of rising interest rates, interest burdens can climb quickly, increasing default risks among borrowers with weak repayment capacity.
The structural weakness is also showing up in closures. Of 3.62 million businesses that held sole proprietor loans last year, 507,000, or 14.0%, were already closed. The closure share was 8.5% among businesses with bank loans, compared with 17.3% among those borrowing from nonbank lenders.
Experts said the issue has moved beyond simple debt growth and into a stage of structural risk. As bank regulations tighten, funding demand shifts to nonbanks, which can feed higher interest burdens, rising delinquencies and more closures. If distress among the self-employed concentrates in nonbank lenders, financial risks could spread across the broader market.
Seon Yong-uk, an associate research fellow at the Korea Institute for Small and Medium Enterprise, said nonbank loan balances and delinquency rates among small merchants have remained high since the COVID-19 pandemic. “If a recovery in domestic demand is not supported, there is little room for small merchants’ business performance to improve, making it difficult for their loan soundness to improve structurally,” he said.
* This article has been translated by AI.
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