"Yoon Seok-yeol Raises Bad Bank Issue... Self-Employed Loans Surge with 4% Interest Rate"

Individual Business Owners Lead Overall Increase in SME Loans
Loan Proportion by Interest Rate Level Shows
2% Loans Disappear, 3-4% Range Share Jumps Significantly

[Image source=Yonhap News]

[Asia Economy Reporter Sim Nayoung] The proportion of new loans to domestic small and medium-sized enterprises (including individual business loans) with interest rates in the 3-4% range reached its highest level in three years. Conversely, loans with interest rates in the 2% range have significantly decreased. As the COVID-19 pandemic has continued for three years, loans to SMEs and self-employed individuals have surged, and with rising interest rates, their debt burden appears to be increasing.

According to the Bank of Korea's statistical system on the 8th, the proportion of SME loans by deposit bank interest rate level (based on new loan amounts) showed that as of February, the share of loans with interest rates between 4% and less than 5% was 18.4%. This is the highest since June 2019 (18.4%) and more than tripled compared to a year ago (5.7%).

The proportion of loans with interest rates between 3% and less than 4% was also recorded at 52.7% in February, the largest since March 2019 (56.9%). Compared to a year ago (21.3%), it nearly doubled. A representative from a commercial bank said, "This phenomenon occurred as ultra-low interest loans disappeared amid rising interest rates," adding, "If the Bank of Korea raises the base rate further, the loan burden will increase." The share of loans with interest rates below 3% was 22.9% in February, significantly down from 70.3% a year earlier.

The outstanding SME loan balance (including individual business loans) at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NongHyup) in March this year was 567.8414 trillion KRW, an increase of 57.4915 trillion KRW compared to the previous year. Among this, the increase in individual business loans was 35.0751 trillion KRW, with self-employed individuals driving the overall SME loan growth.

The Corona Victims Self-Employed General Federation (Coja General Federation), composed of 14 self-employed organizations including the Korea Federation of Restaurants, held a "Government Condemnation Gwanghwamun Rally" on the 15th at the Gwanghwamun Citizen Open Square in Seoul. They demanded the abolition of business hour restrictions, retroactive application of loss compensation and realization of 100% compensation, inclusion of self-employed business owners with sales exceeding 1 billion KRW in loss compensation, preparation of separate support measures by Seoul and local governments, and additional application of loss compensation for all businesses opened after the outbreak of COVID-19. Photo by Moon Honam munonam@

The Presidential Transition Committee is discussing the establishment of a 'bad bank' to alleviate the debt burden of self-employed individuals. A bad bank refers to a bank that purchases non-performing loans from general banks at a low price and disposes of them. For example, if Bank A provides a loan to B secured by collateral, and B fails to repay, the bad bank takes over B's collateral from Bank A and operates by issuing securities (asset-backed bonds) using the collateral or selling the collateral to recover the debt.

According to the Financial Services Commission, the principal amount of self-employed loans with extended maturity or repayment deferral totaled 133.3 trillion KRW as of January. This measure, which began in April 2020 and has been extended four times until September this year, is expected to end soon. It is predicted that small self-employed businesses that have survived the COVID-19 crisis with debt will face mass defaults, causing banks to falter.

Even with soft landing loan repayment support, including up to five years of time and installment repayments, loans from self-employed individuals who find it difficult to repay their debts will be managed by the new government's bad bank. Borrowers will receive customized debt restructuring, including debt forgiveness, before becoming credit delinquents. For example, just like mortgage loans, unsecured loans will be repaid over 30 years to reduce the borrower's burden.