Government Shoulders Debt of Self-Employed Entrepreneurs

49,000 Uncollected Self-Employed Loans Last Year
Increased Risk of Default if COVID-19 Prolongs

[Asia Economy Reporters Kim Min-young and Jang Se-hee] As the number of self-employed individuals unable to repay loans due to business closures and bankruptcies amid economic downturn increases, the debt borne by guarantee institutions with tax funds is also rising. There are concerns that the risk of self-employed business failures could increase further if the COVID-19 (Wuhan pneumonia) crisis prolongs.

According to the Credit Guarantee Foundation Central Association on the 10th, the default rate among small self-employed businesses struggling to repay loans due to closures and delinquencies stood at 3.1% as of the end of December last year. The default rate, which was in the 2% range during the 2008 global financial crisis, has recorded over 3% for two consecutive years since 2018. The default rate refers to the proportion of guaranteed loans with interest or principal overdue for a certain period; a higher rate indicates more self-employed individuals failing to repay loans properly. This is interpreted as a result of government policies such as minimum wage increases and the 52-hour workweek combined with economic downturn.

The number of guarantee default cases, meaning self-employed borrowers who received loans through foundations like the Credit Guarantee Foundation but failed to repay even after maturity, increased by 15,000 from 33,659 cases in 2015 to 48,739 cases last year. The default rate was 8.5% compared to the total 570,247 guarantees last year. This means 8 to 9 out of every 100 people failed to repay their debts on time.

As the number of default cases rises annually, the debt burden on guarantee institutions is also growing. The net subrogation repayment rate, which indicates the proportion of unrecovered amounts from the total guaranteed amount, was 1.77% in 2015, 1.70% in 2016, and 1.83% in 2017. It entered the 2% range in 2019 and reached a record high of 2.15% last year. The net subrogation repayment rate refers to the proportion of subrogated payments that were not recovered, representing the debt that guarantee institutions must bear purely. This reflects a vicious cycle of worsening small business sales → difficulty in loan repayment → debt transfer to the government.

Small business owners account for 89.9% of total guarantees (as of November 2019) and 97.7% of guarantee cases, overwhelmingly dominating the Credit Guarantee Foundation’s guarantees. As the number of self-employed individuals unable to repay debts increases, the financial burden on guarantee institutions inevitably grows. The problem is that if the self-employed business downturn continues due to the coronavirus, the scale of bad collateral loans that must be covered by tax funds could increase further. A Credit Guarantee Foundation Central Association official said, "The rise in the net subrogation repayment rate means that closures or bankruptcies among small business startups have increased."

The risk of loan defaults is also growing among self-employed individuals who started technology businesses in manufacturing and IT sectors. According to the Korea Technology Finance Corporation, the number of default cases among self-employed individuals (sole proprietors) increased from 1,448 in 2015 to 2,063 as of November 2019. The default rate, which indicates the proportion of default cases in total guaranteed balances, rose by 1.2 percentage points over five years: 3.3% in 2015, 4.4% in 2016, 4.0% in 2017, 4.8% in 2018, and 4.5% in 2019. A Korea Technology Finance Corporation official said, "The number of one-person companies (self-employed) struggling due to industrial restructuring in shipbuilding and automobile sectors, economic recession, the 52-hour workweek, and minimum wage increases is rising," adding, "Guarantees must be provided to give self-employed individuals opportunities for recovery and restart, but if the default rate rises, the capacity to support other self-employed individuals decreases, which is a concern."

Experts point out that moral hazard problems may arise if loans are recklessly issued relying on government guarantees. They advise designing the system to raise interest costs to prevent self-employed business failures from spreading to guarantee institutions’ financial soundness issues. Professor Kim So-young of Seoul National University’s Department of Economics said, "If more people borrow from institutions and fail to repay, moral hazard problems can occur," advising, "Raising interest costs to create a fund from those costs to address bad debts is one possible method."

Professor Cho Jang-ok of Sogang University’s Department of Economics said, "It means that the debts of self-employed individuals are being covered by taxes," adding, "The best way is to create an environment where self-employed individuals do not have to rely on the government and to revive the economy itself." She also said, "Government support policies are hard to abolish once established, so decisions should be made carefully while monitoring the environment."

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