Self-Employed Surviving on Debt... 33 Trillion Won Lent by 5 Major Banks in 1 Year of COVID-19 (Comprehensive)

Borrowed 277 Trillion Won from 5 Major Banks Last Month... 12 Trillion Net Increase in Q2 Last Year
"If Combined with Interest Rate Hikes, Default Risks Could Become Uncontrollable"
Experts Say "Proactive Restructuring Is Urgently Needed Over Unconditional Loans"

[Asia Economy Reporters Kwangho Lee and Seungseop Song] As the COVID-19 pandemic prolongs, the financial lifeline of self-employed individuals has dried up, leading to an exponential increase in loans borrowed from commercial banks. In the first quarter of this year alone, new loans to self-employed individuals over the past year reached 33 trillion KRW. This represents an increase of about 14 trillion KRW compared to the same period last year. Concerns are rising that if the sluggish real economy recovery coincides with interest rate hikes, it could trigger a shock across the entire financial market.

According to the financial sector on the 5th, as of last month, loans to individual business owners (SOHO) from the five major banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?totaled 277.9909 trillion KRW (cumulative), an increase of 7.1236 trillion KRW from 270.8672 trillion KRW at the end of last year. Compared to 244.9046 trillion KRW in the same period last year, this is an increase of 33.0863 trillion KRW (13.50%). Compared to the pre-COVID-19 level in March 2019 (225.5896 trillion KRW), the net increase is 19.315 trillion KRW, so this recent rise represents an additional 13.7713 trillion KRW (23.22%). This is interpreted as meaning that the number of self-employed individuals burdened with debt due to sales shocks from COVID-19 has increased accordingly.

By quarter, the largest net increase in loans was in the second quarter of last year, when the COVID-19 impact was greatest, with 12.0464 trillion KRW. This was followed by 8.2997 trillion KRW in the third quarter and 5.6164 trillion KRW in the fourth quarter, before rising again in the first quarter of this year.

Although the debt of self-employed individuals is growing, the problem has not yet surfaced significantly, largely due to the government's COVID-19 financial support policies. The deferment of principal and interest repayments for self-employed individuals has been extended until September this year.

Experts warn that while self-employed individuals are surviving thanks to government financial support, they could become a trigger for instability in the financial market. Oh Jung-geun, Chairman of the ICT Finance Association, analyzed, "There are about 6.5 million self-employed individuals in Korea, of which 4 million are sole proprietors. Many are small-scale, so the risk of default is very high."

In particular, there is a diagnosis that the possibility of defaults could become uncontrollable if it coincides with a period of rising interest rates. Professor Sung Tae-yoon of Yonsei University's Department of Economics emphasized, "It is highly likely that loans to self-employed individuals have increased more in the secondary financial sector, such as savings banks and capital companies, rather than just commercial banks. If the interest rate hike trend continues without sufficient economic recovery, the impact on self-employed individuals will be much more severe than expected."

200,000 Self-Employed at Risk of Default... Default Risk Increases with Interest Rate Hikes

Moreover, the number of self-employed individuals at risk of being pushed to the brink due to inability to manage their debt has surged. According to the Bank of Korea, nearly 200,000 self-employed individuals have become high-risk borrowers due to excessive borrowing amid the COVID-19 fallout. The number of 'high-risk households' among the self-employed, defined as borrowers with a debt service ratio (DSR) exceeding 40% and liabilities exceeding assets, has doubled. As of the end of last year, there were 192,000 high-risk households among the self-employed, a 76% increase from 109,000 in March last year. The Bank of Korea estimates that without the principal repayment deferral measures, the number of high-risk households would have increased by 90% to 207,000 compared to March.

Experts pointed out that despite the overall increase in loans, the sharp rise in self-employed loans is particularly dangerous. Oh Jung-geun, Chairman of the ICT Finance Association, analyzed, "There are about 6.5 million self-employed individuals in Korea, with 4 million being sole proprietors. Although the scale is larger than in other countries, many are small-scale, so the risk of default is very high." He criticized, "Loans have become a means to keep self-employed individuals alive at low interest rates rather than a tool to help them recover."

Professor Kim Dae-jong of Sejong University's Department of Business Administration also warned, "Many self-employed individuals have low credit scores, so the impact of defaults will inevitably be greater than in other loan sectors." He added, "It seems difficult for universities to continue online classes until the end of the year, and it is questionable whether vaccination rates will be high in the first quarter of next year. Self-employed individuals who take out loans despite having no operating profit are highly likely to default if the economy does not normalize."

Concerns were also raised about loans to self-employed individuals in the secondary financial sector. Professor Sung Tae-yoon of Yonsei University said, "Despite the government's various loan regulations, if loans have increased this much, it means borrowers were extremely desperate. It is highly likely that loans to self-employed individuals in the secondary financial sector are more serious than those in the five major commercial banks."

As a solution, experts advocated for proactive restructuring rather than unconditional loans. Professor Oh advised, "If support through funds only prolongs the survival of self-employed individuals, the problem could become more complicated. We should take this opportunity to restructure." Professor Kim also argued, "Policies that continue to support even insolvent borrowers are not desirable. We should naturally guide them to exit the market."

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