[Struggling Self-Employed] Principal Reduction, Interest Rate Cuts... Banks Roll Out Support Measures One After Another

Loan Principal Reduction with Interest Rate Cut
Various Supports Including Restart Support Consulting Provided

As the U.S. central bank, the Federal Reserve (Fed), hinted at additional interest rate hikes, attention is increasing on whether the Bank of Korea's Monetary Policy Committee will raise rates at its meeting scheduled for the 25th. The photo shows a loan counter at a commercial bank in downtown Seoul on the 19th. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Minwoo Lee] Principal reduction, loan interest rate cuts, and consulting support. Commercial banks are also introducing financial support measures for self-employed individuals. The financial sector recognizes that many borrowers among the self-employed who took out business or personal loans from banks during the COVID-19 pandemic have faced difficulties in repayment, so supporting vulnerable borrowers is expected to provide practical help to the self-employed. While the loan burden on self-employed individuals has increased during the interest rate hike period, banks are posting record profits and are accelerating support efforts to avoid criticism of 'profiting from interest.'

According to the financial sector on the 5th, Woori Bank has taken the unusual step among commercial banks of offering principal reduction support. Since last month, for borrowers with a credit rating of 7 or lower and high-risk multiple debtors who have repaid diligently, if the interest rate exceeds 6% per annum when extending the loan, the bank automatically repays the principal with the interest paid above 6%. Principal reduction is more beneficial to vulnerable borrowers than interest rate cuts because it reduces both the principal and interest costs simultaneously.

Woori Bank is also planning, together with the Korea Credit Guarantee Fund, to have experts in management, finance, taxation, and startups visit or remotely assess and advise small business owners on their business status.

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

Interest rate reduction support measures have also been introduced. Shinhan Bank is lowering the interest rates by 1.5 percentage points (P) for multiple debtors (borrowers who have borrowed from three or more financial institutions) who have taken out low-income general credit loans, including the New Hope Loan with an interest rate exceeding 7% as of the end of July. For example, if a borrower's interest rate subject to reduction is 9% per annum, it will be lowered by up to 1.5%P, and if it is 8%, it will be reduced by 1%P, resulting in final rates of 7.5% and 7%, respectively. Shinhan Bank expects about 72,000 people to benefit from this.

Hana Bank is providing various interest rate reduction benefits to 350,000 small business owners and self-employed individuals. When extending the term of high-interest loans exceeding 7% per annum, it offers up to a 1%P interest rate reduction and also provides the 'Small Business Owner Debt Refinancing Loan,' a refinancing loan system for non-bank sectors. Additionally, considering the end of COVID-19 financial support measures this month, the bank plans to operate its own 'Maturity Extension & Installment Repayment Deferral' program starting next month. Furthermore, it plans to actively participate in the government-led 'New Start Fund' together with its affiliate Hana Card.

However, despite these support measures, the base interest rate is expected to continue rising for the time being, so the burden on self-employed borrowers is unlikely to decrease significantly. The Bank of Korea's Monetary Policy Committee raised the base rate by 1.5%P from January to August this year and has expressed intentions to raise it further by the end of the year, inevitably causing loan interest rates to rise as well. According to the Korea Federation of Banks, the range of personal business owner credit loan interest rates at the five major commercial banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) was 2.80?4.48% in the January disclosure (based on loans issued from October to December last year), but rose to 3.60?4.81% in the August disclosure (based on loans issued from May to July this year).

Professor Choi Bae-geun of Konkuk University's Department of Economics advised, "Banks must actively engage in voluntary debt restructuring to prevent the spread of insolvency risks in advance. Banks should not only focus on debt restructuring for low-credit borrowers but also actively work with borrowers who have caused delinquencies due to insolvency."