The government is intensifying its call for financial institutions to increase funding for self-employed individuals, even as it tightens household loan management. However, with the default rate on personal business loans reaching its highest level in 13 years, financial institutions are cautious about expanding lending. This has led to a dilemma between supporting self-employed individuals and maintaining financial soundness.
According to the financial sector on August 12, financial authorities plan to introduce a new credit evaluation model for personal business intermediate loans in October. The loan limit will increase from 20 million won to 30 million won, and the annual supply scale will expand from 100 billion won to a maximum of 150 billion won. Regional credit guarantee foundations will also utilize the new evaluation model for guarantee reviews starting in 2027.
The channels for supplying intermediate loans will also broaden. In addition to banks and savings banks, credit card and capital companies will also be included as lending institutions. Intermediate loans are policy-based mid-interest loans provided through guarantees from Seoul Guarantee Insurance for those with low to moderate credit who find it difficult to access regular credit loans.
However, the financial health of self-employed loans is deteriorating rapidly. As of the end of May, the default rate on personal business loans from domestic banks was 0.84%, the highest level since May 2013. This increase is attributed to a sluggish economic recovery and rising costs, leading to more self-employed individuals struggling to meet loan repayments.
Banking institutions are also taking a cautious approach to expanding personal business loans. The outstanding balance of related loans at the five major banks increased from 324.43 trillion won at the end of last year to 325.92 trillion won by the end of May, but it has since declined to 323.19 trillion won as of August 11. This marks a decrease of approximately 2.7 trillion won compared to the end of May. Given the significant rise in default rates, banks are feeling the pressure to increase their lending in this area.
The financial sector is grappling with the timing of when to increase support for self-employed individuals while also managing credit conservatively. Although demand for funding among self-employed individuals is rising due to economic downturns, the nature of personal business loans means that decreased sales can quickly lead to reduced repayment capacity, increasing the risk of defaults. Additionally, many borrowers have multiple loans from various financial institutions, adding to the concern.
The situation is even more challenging for secondary financial institutions like savings banks, which tend to serve self-employed individuals with lower credit ratings. They are more sensitive to rising default rates and bad debt costs. In fact, the outstanding balance of personal business loans in the savings bank sector has decreased from 24.4 trillion won at the end of 2022 to 12.6 trillion won by the first quarter of this year, nearly halving in less than three years due to ongoing efforts to reduce personal business loans amid a focus on financial soundness.
While there is agreement within the financial sector on the need to enhance access to finance for self-employed individuals, there are voices suggesting that simply increasing loan supply is not a sustainable solution. A financial sector official stated, "We recognize the necessity of financial support for self-employed individuals, but in a situation with high default rates, it is not easy for financial institutions to continue increasing loans. To expand supply through policy, mechanisms must also be established to alleviate the financial burden on these institutions."
* This article has been translated by AI.
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