A 70-year-old self-employed individual, identified as A, who imports seafood from Vietnam and Thailand, recently secured a loan of 50 million won from a bank. The rising exchange rates and sluggish domestic demand have led to a decrease in sales, making it difficult to secure funds for raw material imports and employee wages.
A expressed, "As the exchange rate rises, the amount I have to pay for the same quantity has significantly increased, and with the economy not improving, it's hard to increase delivery volumes. While the loan has alleviated my immediate financial pressure, I am deeply concerned about whether I can continue my business in the future."
As the economic downturn persists, loans for self-employed individuals are increasingly seen as a means of survival. There are growing concerns that the rising burden of defaults among vulnerable borrowers could impact the financial sector's stability.
According to the financial sector on August 12, the total loans for self-employed individuals, including household loans, reached 1,095.5 trillion won by the end of the first quarter of this year, marking a 0.7% increase from the same period last year. This amount represents 28.5% of all loans in the financial sector.
Notably, the number of vulnerable self-employed individuals has surged from 274,000 at the end of 2021 to 409,000 in the first quarter of this year, an increase of 135,000. During the same period, their loan balance rose from 74.7 trillion won to 117 trillion won, a 56.6% increase.
The repayment capacity of these vulnerable self-employed individuals is rapidly deteriorating. Their delinquency rate jumped from 4.93% at the end of the second quarter of 2022 to 12.68% at the end of the first quarter of this year. This indicates that a significant number of the 100 vulnerable self-employed borrowers are struggling to repay their principal and interest. This trend poses a risk to the financial sector's stability. During the same period, the average delinquency rate for personal business loans at the four major banks (KB Kookmin, Shinhan, Hana, and Woori) soared from 0.14% to 0.52%, a 3.7-fold increase. Regional banks in Gyeongnam, Jeonbuk, and Jeju reported delinquency rates nearing 1%.
As more self-employed individuals fail to meet their debt obligations, the number seeking debt restructuring is also rising. By the end of the first half of this year, 206,152 self-employed individuals had applied for the New Start Fund, a debt restructuring program aimed at small business owners, with the total debt amounting to 32.5 trillion won. Among them, 141,821 borrowers have entered into agreements, with the principal amount reaching 12.9 trillion won.
As the quality of self-employed loans deteriorates, financial institutions are tightening their lending criteria. This trend is particularly evident in the second-tier financial sector, which primarily serves low-credit self-employed individuals. The balance of personal business loans at savings banks has decreased from 24.2 trillion won at the end of 2022 to 12.7 trillion won in the first quarter of this year, nearly halving over three years.
The challenge is that as the repayment capacity of self-employed individuals declines, financial institutions may reduce lending to maintain stability, further constricting access to funds for vulnerable self-employed individuals. As these business owners increasingly rely on loans amid economic difficulties, their creditworthiness diminishes, leading to a vicious cycle where financial institutions adopt a more conservative approach to lending.
A financial sector official stated, "In recent years, the real economy has struggled to recover, causing the creditworthiness of self-employed individuals to naturally decline, forcing financial institutions to adopt a more cautious lending approach. If financial conditions worsen further due to rising interest rates, the delinquency rate for self-employed loans could rise sharply, increasing the stability burden on financial institutions."
* This article has been translated by AI.
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