Self-Employed Delinquency Rate Shows 'Red Light'... Second Half of the Year Is a Critical Period

0.39% in February This Year... Up 0.19%p YoY
Rise Inevitable Due to Maturity and Repayment Deferral End
Experts Say "Support Needed Like New Start Fund and Interest Rate Cuts"

The delinquency rate on loans for self-employed individuals is showing a worrying upward trend. Borrowers who have failed to withstand high interest rates and economic slowdown are surfacing. With the repayment deferral measures by the government and financial sector, which have so far suppressed their delinquency rates, set to end, concerns are rising that the delinquency rate increase will be even greater in the second half of this year.

[Image source=Yonhap News]

According to the Financial Supervisory Service on the 27th, as of the end of February this year, the delinquency rate on personal business loans was 0.39%, up 0.06 percentage points from the previous month (0.33%). Compared to February 2022, a year ago (0.20%), it rose by 0.19 percentage points, marking the largest increase among corporate loans (including large corporations, small and medium-sized corporations, and personal business owners). Large corporations had a delinquency rate of 0.09%, which actually decreased by 0.14 percentage points compared to the same month last year, while small and medium-sized corporations saw an increase of 0.10 percentage points to 0.52%.

Professor Seo Ji-yong of the Department of Business Administration at Sangmyung University analyzed, “Due to the economic slowdown, sales of self-employed individuals have not increased, and the principal and interest repayment burden on borrowers who took out loans at high interest rates has grown, causing the delinquency rate to rise.” Researcher Kim Mi-ru of the Korea Development Institute (KDI) explained, “Although the delinquency rate itself is relatively low, the rapid increase calls for heightened vigilance.”

The problem lies ahead. The maturities of loans that were massively extended during the COVID-19 pandemic are approaching one after another. Loans to self-employed individuals steadily increased during the COVID-19 period. The outstanding personal business loans at the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?grew from 299 trillion won at the end of 2021 to 314 trillion won at the end of 2022, an increase of 15 trillion won, and have continued to rise slightly from 313 trillion won in January to 314 trillion won in March this year.

In September this year, the repayment deferral measures for self-employed individuals will also end. Since April 2020, financial authorities and the financial sector have implemented loan maturity extensions and repayment deferrals for them, but starting in October, they will have to repay the principal and interest that were deferred according to their repayment plans. Considering that these policies have so far prevented delinquency rate increases, a rise in delinquency rates in the second half of the year is inevitable.

Experts emphasize the need for a soft landing plan to prevent self-employed individuals from falling into default. Professor Seo stressed, “It is necessary to reduce the possibility of delinquency by extending existing loans through refinancing loans, and the role of private financial institutions is also important, such as activating the right to request interest rate reductions for self-employed individuals whose sales have increased.” Researcher Kim said, “The New Start Fund will play a role in supporting vulnerable borrowers after the repayment deferral ends.” The New Start Fund is a debt adjustment program for small business owners and self-employed individuals, with a scale of 30 trillion won.