[Self-Employed on the Brink] Struggling with 'Triple Hardships'... "The Biggest Crisis Comes Next Year"

5 Major Banks' Soho Loans Near 300 Trillion Won... Record High
Concerns Over Chain Bankruptcies If Interest Rates Rise and Interest Deferral Ends

[Asia Economy reporters Kwangho Lee, Inkyung Jo, Hyojin Kim] Self-employed individuals, who were hit hard by COVID-19, are facing their greatest crisis next year. Despite the phased return to normal life (With COVID-19), the resurgence of COVID-19 has even taken away the foothold for recovery, and with the financial authorities tightening household loans, dependence on high-interest loans is increasing. With rising loan interest rates increasing the burden of interest payments, the Bank of Korea has also signaled further base rate hikes starting this month through next year. This means that more self-employed people who cannot even pay interest will be forced to close their businesses. In particular, if the extension of COVID-19 loan maturities and interest payment deferrals end in March next year, there is a warning that a wave of bankruptcies among the self-employed could become a reality.

◆ Self-employed living on debt reach record high = According to the financial sector on the 23rd, as of the 15th, the outstanding loans to individual business owners (SOHO) held by five banks?KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup?amounted to 297.5334 trillion won, marking the highest level since statistics began. This increased by 23.5181 trillion won just this year, and compared to the end of 2019 before COVID-19 (239.4193 trillion won), it rose by a whopping 58.1141 trillion won. This is interpreted as meaning that many self-employed people have relied on debt to endure the impact on sales caused by COVID-19. Although sales plummeted due to social distancing and other COVID-19 prevention measures, fixed costs such as labor and rent continued to be a burden.

The problem worsened from July when COVID-19 entered a resurgence phase, further deteriorating the business environment for the self-employed. With financial authorities tightening loans, first-tier financial institutions (banks) narrowed their lending, pushing borrowers toward second-tier financial institutions (savings banks, credit card companies, capital companies, etc.). Recently, the Korea Development Institute (KDI) highlighted the reality of self-employed individuals suffering from the double burden of rising interest rates and tightened lending in its report titled "Diagnosis of the Risks of Self-Employed Debt and Policy Directions." According to KDI researcher Yoonhae Oh’s analysis of 4.44 million individual business owners holding household or business loans based on credit rating agency data, the growth rate of household loans held by individual business owners decreased in banks but continued to rise in non-bank sectors after the outbreak of COVID-19. In particular, since the first quarter of this year, the growth rate of household loans to individual business owners has increased significantly in savings banks, credit card companies, and capital companies.

Business loans also increased in high-interest sectors. Especially, the interest rate hike was faster for self-employed individuals with lower income or credit scores. During the same period, the average interest rate on personal business owner credit loans for credit grades 1 to 3 rose from 2.3% to 2.93%, an increase of 0.54 percentage points. In contrast, for borrowers with grade 6 credit, the interest rate on the same product rose from 6.70% to 7.69%, an increase of 0.98 percentage points. This is about twice as fast, indicating a heavier interest burden on vulnerable groups.

Representatives of the Korea Federation of Self-Employed Entrepreneurs are urging for practical compensation near the National Assembly in Yeouido, Seoul. Photo by Moon Honam munonam@

◆ Concerns over chain bankruptcies as interest rates rise and interest deferrals end = The problem is that the interest burden is becoming heavier, and the extension of COVID-19 loan maturities and interest payment deferrals is also set to end in March next year. Loan interest rates have been rising sharply since the Bank of Korea raised the base rate by 0.25 percentage points in August. Some banks already have average interest rates on personal business owner loans reaching 5%.

As interest rates rise, the interest burden on the self-employed inevitably increases. According to the Bank of Korea’s estimates, a 0.5% increase in the base rate would raise the annual interest burden on self-employed individuals by about 2.9 trillion won. If the COVID-19-related financial support measures such as loan maturity extensions and interest payment deferrals end at the end of March next year, the difficulties faced by the self-employed are expected to worsen. As of the end of October, 2,495 companies applied for interest deferrals at the five major banks, with the amount of deferred interest totaling 32.6 billion won. Considering that in the first quarter of this year, 1,724 companies applied with 20.2 billion won deferred, the number of companies at risk is gradually increasing.

As more self-employed individuals facing business difficulties close their businesses, the number of Yellow Umbrella mutual aid payments is also on the rise. According to the Korea Federation of SMEs, the number of Yellow Umbrella mutual aid payments for business closures in the first half of the year totaled 48,394 cases, a 17% increase compared to 41,257 cases in the same period last year.

Experts advise that since the business and financial difficulties of the self-employed cannot be resolved in the short term, the government and financial sector need to quickly prepare countermeasures. Professor Junggeun Oh of Konkuk University’s Department of Economics said, "The issue is whether the economy will recover enough for self-employed individuals to repay deferred loans, which realistically seems difficult. The government should prepare fiscal responses, and financial institutions should consider measures to mitigate shocks, such as voluntary contract renewals or maturity extensions and gradual restructuring of borrowers."

There are also calls for long-term efforts to restructure the self-employment market rather than temporary approaches such as reducing or partially forgiving debt burdens. Professor Sangbong Kim of Hansung University’s Department of Economics emphasized, "Short-term debt forgiveness or fiscal support does not help solve the fundamental problem. It is urgent to adjust the market structure by curbing indiscriminate entry into the self-employment market and allowing natural exits from the market."