[Multiple Debts Time Bomb] "Borrowed money here, there, and everywhere... but I am giving up the store"

Self-Employed Borrowers with Loans from 3+ Places
On the Brink Due to Interest Burden and Sales Decline
Loan Extensions and Repayment Deferrals Ending Soon
Warning Signs of Large-Scale Chain Defaults

[Asia Economy Reporter Kwangho Lee] Lee Seon-gyun (40, pseudonym), who runs a pub near Hongik University in Mapo-gu, Seoul, recently decided to close his business. Compared to before COVID-19, his monthly sales dropped by more than 60%, and the loans he had taken several times to cover household expenses and living costs had ballooned like a snowball. Lee said, "I have spent the past two years with sighs and tears due to COVID-19," adding, "I tried to endure somehow, but it’s no longer possible."

The reason self-employed individuals who have borrowed money from three or more financial institutions are being identified as a major trigger for large-scale insolvency is due to the worsening conditions approaching a limit. The Bank of Korea has indicated further base rate hikes this year, significantly increasing interest burdens, while sales, which plummeted due to the COVID-19 crisis, show little chance of recovery. The loan maturity extension and principal and interest repayment deferral policies, which are expected to be extended, are currently announced by financial authorities to end in March. There are concerns that self-employed individuals, who are unable to repay even the interest, let alone the principal, could collapse all at once. Experts warn that self-employed people tend to rely heavily on secondary financial institutions with relatively high interest rates, making them the first to be hit during interest rate hikes, potentially leading to a chain of insolvencies.

The streets of Myeongdong, Seoul, are quiet on the 6th amid the ongoing COVID-19 situation. Photo by Mun Ho-nam munonam@

◆Self-Employed Facing Mass Bankruptcies= According to data submitted by NICE Information Service to Yoon Chang-hyun, a member of the National Assembly’s Political Affairs Committee from the People Power Party, the outstanding corporate loans (personal business loans) borrowed by sole proprietors (self-employed) across all financial sectors amounted to approximately 632 trillion won as of the end of November last year. This is a 31.2% increase over two years compared to the end of 2019 (482 trillion won), just before the COVID-19 outbreak.

The number of sole proprietors who took out corporate loans also rose by 32.2%, from 2,095,162 to 2,769,609 during the same period. As of the end of November last year, the average loan amount per sole proprietor holding corporate loans was about 228.19 million won. Among the rapidly increasing self-employed, multi-debtors who borrowed money from three or more financial institutions, including banks and secondary and tertiary financial sectors, have also surged. By definition, multi-debtors are those who have borrowed from three or more financial institutions. The fact that they have accepted lower credit ratings and high interest rates to borrow from secondary and tertiary financial institutions indicates unstable financial capacity and that they are pushed to the brink.

The problem is that the future outlook is even bleaker. With incomes either stagnant or at risk of decline, the full-scale interest rate hikes will inevitably increase the burden on multi-debtors who already struggle to repay principal and interest. The base rate, which serves as the benchmark for bank loan interest rates, was raised twice last year and again by 0.25% this month.

Meanwhile, self-employed individuals expect their sales to decline again this year due to COVID-19. Notably, four out of ten self-employed people are considering closing their businesses. According to the Federation of Korean Industries’ ‘2021 Performance and 2022 Outlook Survey,’ 65.4% of self-employed respondents anticipated a decrease in sales compared to the previous year. Average sales are expected to drop by 9.4%, and net profits by 8.4%. Particularly, 40.8% of self-employed respondents said they are currently considering business closure.

On the 6th, as the COVID-19 situation continues, the streets of Myeongdong in Seoul are quiet. Photo by Moon Honam munonam@

◆Concerns Over Large-Scale Insolvency= The Bank of Korea emphasized in last month’s ‘Financial Stability Report’ that "due to the emergence of COVID-19 variants and prolonged social distancing, the debt repayment capacity of self-employed individuals may deteriorate. Therefore, relevant authorities and financial institutions need to strengthen risk management and devise tailored management plans for vulnerable and high-risk self-employed individuals."

The Bank of Korea diagnosed that despite low delinquency rates due to current financial support, there are many latent risks in self-employed loans (personal business loans + household loans) from various perspectives. As of the third quarter of last year, the proportion of ‘non-residential real estate’ secured loans, which have low liquidity, stood at 29.0%, 2.5 times higher than the 11.7% for non-self-employed borrowers. The Bank of Korea explained that if real estate prices fall, the debt repayment capacity of self-employed individuals could weaken. Additionally, 45.6% of self-employed loans are bullet repayment loans with heavy repayment burdens, and 69.8% have maturities within one year (based on personal business loans), which is also a concerning factor.

The Bank of Korea estimated that if the small business loan maturity extension and principal and interest repayment deferral measures end in March, the total debt service ratio (DSR) of self-employed individuals would reach 41.3%, 2.2 percentage points higher than the 39.1% level if support continues. Ultimately, if financial support ends, loan defaults among self-employed individuals will materialize, and risks could spread from secondary financial institutions that lent to them to primary financial institutions.

Experts emphasize the need for tailored policy formulation and management by assessing the competitiveness of multi-debt self-employed individuals, the degree of excessive competition by industry, and recovery potential after COVID-19. Kim Wan-jung, a research fellow at Hana Financial Management Research Institute, pointed out, "It is a critical time to closely examine self-employed loans and establish and implement policies that minimize household insolvency."

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