[Struggling Self-Employed] Recession, Interest Rate Hikes, and End of Maturity Extensions... Is the Self-Employed Debt Time Bomb About to Explode?

Self-Employed Struggling to Repay Debt Amid Multiple Adverse Factors
Income Decreases While Debt Burden Grows
Significant Increase in Self-Employed Loans During COVID-19
Financial Sector Faces Red Flags Due to Rising Default Risks

On the 3rd, a restaurant in Myeongdong, Seoul, where self-employed people’s worries are deepening, is quiet. Photo by Mun Ho-nam munonam@

"Merchants like me, who borrowed money from banks and desperately try not to delay repayment even for a day, are ticking time bombs. I have managed so far, but with prices soaring crazily and the economy worsening like these days, I don't know what will happen next year." Kim Chang-jin (57), who runs a pork belly restaurant in Suwon, Gyeonggi-do, is a local owner who has operated his store in his neighborhood for over 30 years. Even during COVID-19, regular customers occasionally visited, and he maintained operations by borrowing from banks for operating expenses. He said, "I haven't even bought a single pair of socks this year because I had to repay bank loans," adding, "During COVID-19, neighborhood store owners had to choose between closing their shops or drowning in debt."

Since the pandemic spread in 2020, loans to self-employed individuals have surged sharply, triggering red flags in the financial sector due to the risk of defaults. In particular, middle-income self-employed people, whose business income has shrunk, are facing a heavy debt repayment burden relative to their income.

Self-employed face increasing debt repayment burden relative to income

According to the Bank of Korea on the 5th, the DSR (Debt Service Ratio) of middle-income self-employed households (top 30-70%) was 41.3% last year. For example, if they earn 1 million KRW per month, 410,000 KRW goes to debt repayment. Low-income self-employed had a DSR of 38.8%, and high-income 39.5%, slightly lower than the middle-income group.

The Bank of Korea expects that if additional economic shocks occur, the debt burden of middle- and low-income self-employed will increase sharply. Based on three conditions (0.5 percentage point increase in the base interest rate this year and next year, termination of financial support in September, and the effect of loss compensation funds), a simulation of changes in DSR for self-employed households showed that the DSR of the bottom 30% low-income self-employed would surge from 34.5% this year to 48.1% next year, a 13.6 percentage point jump. Middle-income households would also rise from 38.6% to 47.8%, nearly a 10 percentage point increase. If they start failing to repay debts, the primary and secondary financial sectors will inevitably be impacted.

A restaurant in Myeongdong, Seoul, is quiet on the 3rd as the worries of self-employed business owners deepen. Photo by Mun Ho-nam munonam@

The Bank of Korea analyzed, "With the termination of loan maturity extension support measures starting this month and rising loan interest rates, there are concerns that the debt repayment ability of self-employed individuals may rapidly deteriorate." It added, "Since many self-employed borrowers have multiple debts from various banks, if a specific loan defaults, the contagion of defaults across financial sectors will spread quickly."

Government loan and guarantee delinquencies surge annually

Signs of loan defaults among self-employed individuals are already being detected in various places. The number of self-employed people who cannot even pay interest on loans taken through government loan and guarantee programs is increasing. According to the National Assembly Budget Office’s ‘2021 Fiscal Year Settlement Report,’ the default rate of the Credit Guarantee Fund’s 'Small Business Entrusted Guarantee Program' rose from 0.2% in May 2020 to 2.2% in March 2022.

The Small Business Entrusted Guarantee Program provides guarantees up to 40 million KRW when small business owners, hit hard by COVID-19, borrow from banks. The problem is that guarantee defaults have occurred since the program’s first year and the default rate has continued to rise. Guarantee defaults are counted when borrowers fail to pay interest or repay principal. Under this program, borrowers pay only interest for the first two years and then repay principal and interest in installments from the third year. Nevertheless, the number of small business owners who could not even pay interest from the year they borrowed increased during the COVID-19 period.

Among self-employed who borrowed government policy funds at low interest rates of 1-4% annually, the number of those unable to repay is rapidly increasing. According to data on 'Policy Fund Delinquency Status' submitted by the Small Enterprise and Market Service to Rep. Lee Cheol-gyu of the People Power Party, the scale of policy fund loan delinquencies reached record highs after COVID-19.

On the 3rd, a store in Myeongdong, Seoul, managed by a self-employed person, closed down, leaving the area quiet as their worries deepen. Photo by Mun Ho-nam munonam@

In December 2019, just before COVID-19 spread, the cumulative number of cases overdue by more than 90 days for policy fund repayments was 2,410 cases (122.8 billion KRW). By the end of 2020, it rose to 4,400 cases (186.2 billion KRW), by the end of 2021 to 8,284 cases (249.1 billion KRW), and by July this year to 12,424 cases (308 billion KRW). In less than three years, the number of delinquencies increased fivefold and the amount overdue tripled.

The Small Enterprise and Market Service has operated a support program since 2016 that directly lends operating funds to micro self-employed businesses with fewer than five regular employees. Despite providing funds at much lower interest rates than general banks, the number of self-employed who cannot repay their debts is increasing.

Industry voices say the government needs to pay close attention to signs of defaults when the extension of small business loan maturities ends at the end of this month. A representative from the Korea Federation of Small and Medium Business said, "The government should specifically identify those who barely managed to repay debts during COVID-19 without significant credit deterioration or being classified as delinquents, examine their signs of default, and consider support." He added, "Before defaults accumulate, government-level financial education for risk management targeting small business owners should also be implemented."