"Possibility of Default on Self-Employed Loans Significantly Higher Than Household Loans"

Rep. Yoon Chang-hyun's Forum on 'Top 3 Risks in Domestic Financial Market and New Government's Response Strategy'
Discussion on Household Debt, Self-Employed Loans, and Real Estate Finance Measures

[Asia Economy Reporter Sim Nayoung] "Loans to self-employed individuals have a significantly higher likelihood of default compared to household debt," said Shin Yongsang, Head of the Financial Risk Research Center at the Korea Institute of Finance.

"Loan regulation criteria should be simplified to increase the housing purchase capacity of actual demanders such as one-homeowners and non-homeowners," said Kang Minseok, Head of the Real Estate Research Team at KB Management Research Institute.

"As interest rates rise, the default rates in the household loan market and the small business loan market will expand," said Kim Youngil, Head of the NICE Evaluation Research Center.

Domestic economic experts diagnosed the current problems related to household debt, self-employed loans, and real estate finance and made policy recommendations to President-elect Yoon Seok-yeol. On the 30th, Yoon Changhyun, a member of the People Power Party, held a forum titled 'The Three Major Risks in the Domestic Financial Market and the New Government's Response Strategy.' Yoon said, "Self-employed individuals, who faced business restrictions due to COVID-19 quarantine guidelines, are in a situation where they are barely able to cover loan interest with government-provided quarantine support funds," warning that "strengthening regulations to prevent household debt defaults has actually blocked funding for housing and livelihood-related actual demand, increasing the risk that low-income people will be pushed into alternative markets."

Center Head Shin said, "Considering that the size and growth rate of domestic household debt relative to GDP are among the highest globally, the rapid deterioration in debt quality, and the strong causal relationship between the real estate market and household debt, management of household debt is necessary." He suggested expanding the Loan-to-Value ratio (LTV) while maintaining the Debt Service Ratio (DSR) system, which determines loan amounts based on individual income.

He added, "The abnormally operated LTV should be normalized to an appropriate level in line with the housing supply speed to smoothly provide housing finance to actual demanders, while establishing loan practices within repayment capacity through borrower-specific DSR regulations."

Regarding loans to the self-employed, he said, "Loans to self-employed individuals are large per person and often high-interest, with ongoing business downturns, making the likelihood of default significantly higher than household debt." He recommended establishing a private joint committee to support financial aid, credit recovery, and social fiscal support.

Team Leader Kang said, "The housing market is increasingly showing signs of economic adjustment, making it easier to review policy directions," advising ▲allowing an LTV of up to 80% for first-time homebuyers ▲lifting the ban on loans for apartments priced over 1.5 billion KRW ▲applying a uniform LTV of 60% for loans exceeding 900 million KRW and managing risks through DSR.

He also said, "To prevent losses on jeonse deposits when housing prices fall, the sale-jeonse price should be limited to 80% or less, and the excess should be converted to monthly rent." He emphasized, "Jeonse loan amounts should be included in DSR calculations to reduce the impact of increased liquidity on housing prices, and jeonse loan management should be implemented to suppress liquidity."

Center Head Kim warned, "Due to maturity extensions and repayment deferral policies for small business loans, the default rate appears low on indicators, but the actual debt repayment capacity may have deteriorated." He cautioned, "In the household loan market, attention should be paid to the rising default risk of vulnerable borrowers and borrowers holding large variable-rate loans."

Professor Yang Junmo of Yonsei University, who chaired the forum, said, "As interest rates rise, delinquency and default rates should also increase, but there has been a gap due to COVID-19 policies." He added, "Support policies for vulnerable borrowers should be prepared in case these policies are removed later." He also said, "Banks need to review debt risks of vulnerable borrowers in detail," noting, "Although banks have set aside large provisions and net profits have increased, active responses are still needed as defaults continue to rise."

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