[Tears of the Self-Employed Republic] 'Bosses' Rolling Over Debt... Bank Loans to Self-Employed Up 17 Trillion Won in One Year

[Asia Economy Reporter Kim Hyojin] It has been revealed that loans to self-employed individuals by major banks increased by as much as 17 trillion won over the past year. This indicates that the market is worsening due to structural recession and excessive competition, leading to an increase in self-employed people surviving on debt. As loans to sustain businesses increase, delinquency rates are also sharply rising. Concerns about the soundness of bank loans are growing due to the increase in delinquency rates, which are a lagging indicator, raising fears that this could become a ticking time bomb for our economy.

According to financial authorities and the financial sector on the 6th, loans to self-employed individuals (individual business owners) by the five major commercial banks?KB Kookmin, Shinhan, KEB Hana, Woori, and NH Nonghyup?amounted to 222.207 trillion won at the end of December 2018 and increased to 239.4193 trillion won by the end of December last year, a rise of 17.2123 trillion won (about 7.7%) over one year. Shinhan Bank and NH Nonghyup Bank saw self-employed loans increase every month without exception during this period. Other banks also saw increases in self-employed loans every month except for three or four months. As of September last year, total individual business owner loans across all banks stood at 332.3 trillion won, up 23.2 trillion won (7.5%) compared to the same period the previous year.

Although the growth rate of around 7% is not particularly high compared to previous years, the steady increase and market conditions are considered worrisome. Above all, the weakening of the self-employed market base heightens concerns. According to an analysis of National Tax Service statistics by the Korea Deposit Insurance Corporation, the proportion of self-employed businesses that closed within less than three years increased from 53.3% in 2015 to 58.4% in 2017. This means that two out of three self-employed individuals who closed their businesses did not last even three years. The money they borrowed is likely to remain as non-performing loans from the banks' perspective.

The deterioration in repayment ability of small-scale self-employed individuals, who generally have poorer financial capacity, also supports this outlook. According to the Financial Stability Report released by the Bank of Korea on the 26th of last month, the interest repayment burden ratio (annual interest repayment amount as a percentage of income) for low-income self-employed individuals earning less than 30 million won annually (excluding those with loans exceeding 500 million won) rose from 19.6% in 2017 to 23.9% at the end of the third quarter last year.

The situation is even more severe when looking specifically at the wholesale and retail trade, lodging, and food service sectors, where many small-scale self-employed individuals are concentrated. The delinquency rate on loans for lodging and food service sectors at KB Kookmin, Shinhan, KEB Hana, and Woori Banks rose from 0.25% at the end of 2018 to 0.29% at the end of the third quarter last year, while the delinquency rate for wholesale and retail trade increased from 0.32% to 0.36% during the same period.

The pockets of self-employed individuals are becoming increasingly empty. According to Statistics Korea, the average monthly 'business income' for all households in the third quarter of last year was 879,800 won, a 4.9% decrease compared to the third quarter of the previous year. This is the largest decline since Statistics Korea began compiling related statistics in 2003. According to the Business Survey Index (GBSI) conducted by the Korea Credit Guarantee Fund, which supports loan guarantees for self-employed businesses, among 2,503 self-employed business sites surveyed in the third and fourth quarters of last year, 8 out of 10 self-employed individuals experienced a sales decline in the third quarter and suffered financial difficulties.

The financial condition performance index for self-employed individuals in the third quarter was 54.2, well below the baseline (100), dropping 3.3 points from the previous quarter. 81.4% experienced sales declines, worsening their financial conditions. The Bank of Korea pointed out, "Low-income self-employed individuals tend to have small business scales and lack the capacity to withstand sluggish business conditions, making it likely that loan soundness will deteriorate rapidly during economic slowdowns."

Financial authorities are considering measures to somewhat raise the lending barriers for self-employed individuals by assessing not only creditworthiness but also the total debt service ratio (DSR), including previously taken household loans, when granting loans to individual business owners. This is based on the judgment that a structure relying on loans to 'survive' without the self-employed market having self-sustaining power is harmful in all aspects, including the market and financial soundness.

The financial sector agrees that, along with such measures, fundamental restructuring of the loan structure for the self-employed market and self-employed individuals is necessary. This is because the loan patterns in the self-employed market are unlikely to improve dramatically in the short term due to the combined effects of government regulations on mortgage loans, policies expanding loans to small and medium enterprises, and low interest rates.

This content was produced with the assistance of AI translation services.