[Weak Link - Self-Employed] Using All Funds Including Living Expenses... Debt Recycling Leads to Business Closure

Self-Employed Loan Balance at the End of Last Year 803.5 Trillion
Increased by 118.6 Trillion Compared to the Previous Year
About Twice the Previous Year's Increase of 60.6 Trillion

[Asia Economy Reporters Kwangho Lee and Seungseop Song] Jeon Sujong (61, pseudonym), who ran a Korean restaurant in Yeouido, Seoul, decided to close his business this month due to a sharp decline in sales caused by the COVID-19 pandemic. Given Yeouido’s characteristic of being sparsely populated on weekends, he had been relying on weekday sales, but with weekday sales also dropping due to COVID-19 and restrictions on private gatherings among public institution employees, he could no longer sustain the business and decided to shut down. The problem lies in the approximately 200 million KRW loan he took from the bank last year for internal expansion 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 drastically reduced sales because of bank debts. I have used up all the money I had, and I can’t sleep at night worrying about how to repay the loans.”

It has been revealed that 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 there are concerns that if the real economy’s recovery remains slow and interest rates rise simultaneously, 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 to the brink of bankruptcy, and emphasize the need for an exit strategy.

◆ Self-employed debt reached 120 trillion KRW last year, double the previous year = According to 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 KRW, an increase of 118.6 trillion KRW (17.3%) compared to 684.9 trillion KRW a year earlier. The household debt DB is a statistic compiled quarterly by the Bank of Korea by collecting credit information on about one million people from the credit rating agency NICE Information Service. The increase last year was about twice the 60.6 trillion KRW (9.7%) increase recorded the previous year. Of the increased self-employed loan balance last year, bank loans accounted for 69.4 trillion KRW, and non-bank loans were 49.2 trillion KRW. The growth rate of non-bank loans (22.3%) was higher than that of bank loans (14.9%). The number of self-employed borrowers last year was 2.384 million, up 470,000 (24.6%) from 1.914 million a year earlier. The increase in borrowers was about 3.3 times that of 2019 (144,000). Both the balance growth rate (17.3%) and borrower growth rate (24.6%) last year were the highest in the past five years.

In particular, the loan balance of self-employed individuals who borrowed for the first time last year was 125.8 trillion KRW, 38.8 trillion KRW more than 87 trillion KRW a year earlier. This shows that they endured business difficulties caused by COVID-19 by mobilizing debt.

The difficulties faced by self-employed individuals stand out when compared to other economic actors. 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 Daejong of Sejong University’s Department of Business Administration said, “The government restricted outings and consumption through social distancing and gathering bans, so self-employed individuals 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 Donggeun of Myongji University’s Department of Economics also criticized, “The rapidly increasing self-employed loans are a warning sign for the Korean economy,” and said, “The astronomical increase is due to prolonged social distancing and slow vaccine rollout.”

One in Ten Self-Employed Borrowers with Personal Business Loans Are Multiple Debtors

◆ Many Close Businesses Amid Debt Rollover = 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 Changhyun, 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 128,799 a year earlier. Among 2,544,583 self-employed individuals who took out personal business loans, about 199,850 (approximately 8%) were multiple debtors. In other words, about one in ten self-employed individuals struggles with debts from multiple financial institutions. In terms of amount, out of the total personal business loan amount of 557 trillion KRW, 129 trillion KRW (23.2%) was borrowed by multiple debtors. When adding 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 significant number have closed their businesses due to deteriorating profits. According to Statistics Korea, the number of self-employed individuals decreased by 239,000 from 5.695 million in April 2017, before the Moon Jae-in administration, to 5.456 million as of March this year. In particular, many self-employed individuals decided to close their businesses because they could not pay wages to employees. The number of self-employed individuals with employees dropped by 284,000 from 1.588 million in April 2017 to 1.304 million in March.

There are calls for comprehensive support measures and proactive restructuring for self-employed individuals, who could become a financial time bomb. Oh Junggeun, 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 tool to help them recover,” and stressed, “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.”