During One Year of COVID-19, Self-Employed Bank Debt Increased by 33 Trillion Won...Red Alert on Risk Threshold

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[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 increase of 13.7713 trillion KRW (23.22%) is significant. This is interpreted as meaning that the number of self-employed individuals burdened with debt due to COVID-19-related sales shocks has increased accordingly.

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By quarter, the largest net increase in loans occurred in the second quarter of last year, when the COVID-19 impact was severe, with 12.464 trillion KRW added. 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 fact that problems have not yet surfaced is largely attributed to the government's COVID-19 financial support policies. The deferment of principal and interest payments for self-employed borrowers 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 financial market instability. 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 insolvency is very high."

In particular, the possibility of insolvency 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 mainly in the secondary financial sector, such as savings banks and capital companies, not 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."

Moreover, the number of self-employed individuals pushed to the brink due to inability to manage their debt is rapidly increasing. According to the Bank of Korea, nearly 200,000 self-employed individuals have become at high risk of insolvency due to excessive borrowing caused by the COVID-19 aftermath. The number of 'high-risk households'?those likely unable to repay their debts?among the self-employed has doubled. The Bank of Korea defines 'high-risk households' as borrowers whose total debt service ratio (DSR) exceeds 40% and whose liabilities exceed their assets. 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% from March to 207,000.

Professor Kim Dae-jong of Sejong University's Department of Business Administration expressed concern, saying, "Loans to self-employed individuals are inevitably more vulnerable than other loan sectors. Self-employed individuals who take out loans even without operating profits are highly likely to become insolvent if the economy does not normalize."

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