As high interest rates continue to rise, delinquency rates among low-credit self-employed individuals are sharply increasing. This trend is exacerbated by recent interest rate hikes from major economies like the United States and Japan, raising concerns about the long-term impact of sustained high rates. Analysts warn that increased repayment burdens on vulnerable borrowers could lead to greater challenges for banks in maintaining financial stability.
According to financial sector data released on September 20, the delinquency rate for personal business loans among the five largest banks in South Korea (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) has surged. For credit grade 7, the delinquency rate rose from 1.68% at the end of 2021 to 6.58% by the end of August this year, while for grade 9, it jumped from 4.56% to 23.58%. This represents increases of 3.9 times and 5.2 times, respectively, over four years and eight months. The delinquency rate for the lowest grade, grade 10, has reached 44.64%.
This data reflects the average delinquency rates for personal business loans categorized by credit grades, as compiled by each bank in accordance with the Financial Supervisory Service's standard 10-grade system.
With domestic economic conditions struggling, many self-employed borrowers who have relied on loans to cover living expenses and business operating costs are finding it increasingly difficult to meet their monthly repayment obligations. This has led to a vicious cycle where their credit ratings decline, making it harder to secure additional loans.
Delinquency pressures are also evident in household loans. According to data submitted by the Korea Housing Finance Corporation to Park Seong-hoon, a member of the National Assembly's Political Affairs Committee, the amount of delinquent loans under the government-backed mortgage program reached 548.9 billion won by the end of July, a fivefold increase from 110.4 billion won at the end of 2021. During the same period, the overall delinquency rate for this mortgage program rose from 0.13% to 0.47%. Notably, borrowers with annual incomes below 10 million won had a delinquency rate of 1.01%, more than double the overall average.
The situation is concerning as the repayment burdens on vulnerable borrowers continue to accumulate while major economies like the U.S. and Japan are raising their benchmark interest rates. On September 16, the U.S. Federal Reserve raised its benchmark rate by 0.25 percentage points, from 3.50-3.75% to 3.75-4.00%. Similarly, the Bank of Japan increased its rate from 1.0% to 1.25% on September 18. As these countries maintain a tightening stance, there are concerns that global interest rates may remain elevated.
While increases in major countries' interest rates do not immediately lead to hikes in South Korea's benchmark rate, prolonged high rates abroad could influence domestic market rates through global bond yields and foreign exchange market volatility. Analysts suggest that the Bank of Korea may find it challenging to lower its benchmark rate quickly due to domestic economic conditions.
If domestic market interest rates remain high, banks may face increased funding costs and upward pressure on new loan rates. This could further exacerbate the interest burdens on already vulnerable borrowers, leading to additional delinquencies.
As delinquency rates rise, banks will also face greater challenges in managing their financial stability. An increase in new delinquencies will lead to higher provisions for bad debts and costs associated with managing non-performing loans. Even if banks write off or sell delinquent loans, ongoing new delinquencies may limit improvements in overall delinquency rates.
A financial sector official stated, "As major economies like the U.S. and Japan continue to raise their benchmark interest rates, concerns are growing over rising global market interest rates and increased volatility in financial markets. If the high interest rate trend persists, borrowers' repayment burdens will intensify, particularly among vulnerable borrowers, which could lead to increased delinquency and further strain on banks' financial stability."
* This article has been translated by AI.
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