Last Year, Self-Employed Borrowers Took Out 14 Trillion Won in Loans for the First Time... "Closed Business Due to Rolling Over Debt" (Comprehensive)

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[Asia Economy Reporters Kwangho Lee, Seungseop Song]Jeon Sujong (61, pseudonym), who ran a Korean restaurant in Yeouido, Seoul, decided to close his business this month as sales plummeted due to the COVID-19 pandemic. Given Yeouido's characteristic of being sparsely populated on weekends, he had been holding on with weekday sales, but with weekday sales also declining due to COVID-19 and restrictions on private gatherings among public institution employees, he could no longer endure and decided to close down. The problem is the loan of about 200 million won he took from the bank last year for internal expansion construction and labor costs. Although the government has deferred the principal and interest payments, this relief will end in September. Mr. Jeon lamented, "Many restaurants around here cannot close despite a sharp drop in sales because of bank debts," adding, "I've used up all the money I had, and I can't even sleep at night worrying about how to repay the loans."

Seong Woo-hwan (55, pseudonym), who operates a karaoke room in Gyeonggi Province, recently filed for personal bankruptcy. Due to social distancing measures that prohibited karaoke operations amid the COVID-19 pandemic, he suffered a sales cliff and eventually closed his business. Last year, he laid off employees to reduce labor costs and borrowed money from banks and loan companies, but the high-interest rates only increased his debt. Mr. Seong complained, "After closing due to COVID-19, it's tight just to pay bank interest, and the future looks bleak," adding, "I'm waiting for the court to grant a discharge of bankruptcy."

Self-employed individuals, the most vulnerable link in our economy, endured COVID-19 last year by relying on debt. They have weathered the prolonged business difficulties caused by COVID-19 by mobilizing debt, but concerns arise that if the sluggish real economy recovery coincides with interest rate hikes, it could lead to shocks across the entire financial market. Experts point out that the real economy has contracted further due to COVID-19, pushing self-employed individuals facing bankruptcy to their limits, and that an exit strategy must be prepared.

◆ Self-employed debt reached 120 trillion won last year, double the previous year = According to data from the 'Household Debt Database (DB)' submitted by the Bank of Korea to Jang Hye-young, a member of the National Assembly's Planning and Finance Committee from the Justice Party, the outstanding loans of self-employed individuals at the end of last year amounted to 803.5 trillion won, an increase of 118.6 trillion won (17.3%) from one year earlier (684.9 trillion won).

The Household Debt DB is a statistic surveyed quarterly by the Bank of Korea, collecting credit information on about one million people from the credit inquiry company NICE Information Service. The increase last year was about twice the increase of 60.6 trillion won (9.7%) one year earlier.

Among the increased outstanding loans of self-employed individuals last year, bank loans accounted for 69.4 trillion won, and non-bank loans were 49.2 trillion won. The increase rate was higher for non-bank loans (22.3%) than for bank loans (14.9%). The number of self-employed borrowers last year was 2,384,000, up 470,000 (24.6%) from one year earlier (1,914,000). The increase in borrowers was about 3.3 times that of 2019 (144,000). Both the outstanding loan growth rate (17.3%) and borrower growth rate (24.6%) last year were the highest in the past five years.

In particular, the outstanding loans of self-employed individuals who borrowed for the first time last year amounted to 125.8 trillion won, 38.8 trillion won more than one year earlier (87 trillion won). This shows that they endured business difficulties caused by COVID-19 by mobilizing debt.

The difficulties of self-employed individuals stand out compared to other economic agents. The increase rate of self-employed loan balances last year was 17.3%, higher than that of households (8.3%) and corporations (15.6%).

Experts express concern that self-employed loan indicators have reached a critical point in the economic crisis. Professor Kim Dae-jong of Sejong University's Department of Business Administration said, "The government blocked outings and consumption (through social distancing, gathering bans, etc.), so self-employed people had no choice but to rely on debt," adding, "Now, self-employed individuals who cannot get loans from commercial banks are turning to private loans, making the problem more serious."

Professor Cho Dong-geun of Myongji University's Department of Economics also criticized, "The rapidly increasing self-employed loans are a warning sign for the Korean economy," adding, "Social distancing has continued for a long time, and vaccinations have not been carried out quickly, causing astronomical increases."

Due to the strengthened social distancing measures amid the spread of COVID-19, the worries of self-employed business owners are deepening. On the 23rd, a rental notice was posted at a store located on Samcheong-dong street in Jongno-gu, Seoul. This area used to be bustling with foreign tourists even on weekdays, but with the global spread of COVID-19 shutting down air routes, the number of foreign tourists has sharply declined. Photo by Jinhyung Kang aymsdream@

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◆ Many closures amid juggling debts = Among self-employed individuals who endured by borrowing, many are multiple debtors who borrowed from three or more financial institutions. According to data received by Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, from NICE Information Service, the number of multiple debtors among individual business owners last year was 199,850, a 55% increase from one year earlier (128,799).

Among 2,544,583 self-employed individuals who took out personal business loans, 199,850 (about 8%) are multiple debtors. In other words, about one in ten self-employed individuals is struggling with debts from multiple financial institutions. In terms of amount, out of the total personal business loan amount of 557 trillion won, 129 trillion won (23.2%) was borrowed by multiple debtors. Adding the household loans borrowed by self-employed individuals, the number of multiple debtors is expected to increase sharply. Many self-employed individuals hold both personal business loans classified as corporate loans and household loans such as mortgage loans or credit loans.

While some self-employed individuals have endured COVID-19 with bank loans, a considerable number have closed due to deteriorating profits. According to Statistics Korea, the number of self-employed individuals decreased by 239,000 from 5,695,000 in April 2017, before the Moon Jae-in administration, to 5,456,000 as of March this year. In particular, many self-employed individuals decided to close because they could not pay wages to employees due to COVID-19. The number of self-employed individuals with employees decreased by 284,000 from 1,588,000 in April 2017 to 1,304,000 in March.

There are calls for comprehensive support measures and proactive restructuring for self-employed individuals, who could become a financial time bomb. Oh Jung-geun, chairman of the ICT Finance Association, emphasized, "Bank loans have become a means to keep self-employed individuals alive at low interest rates rather than a role to help them recover," adding, "We should take this opportunity for restructuring." Professor Cho advised, "Rather than nationwide disaster relief funds, efforts are needed to prepare comprehensive measures for self-employed individuals who are truly in need and vulnerable."

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