[Geuman Report] "Rapid Increase in Self-Employed Unable to Repay Debt... Debt Restructuring Needed"

Self-Employed Delinquency Rate Rises from 0.5% to 1.52% in About 2 Years
Vulnerable Borrowers' Delinquency Rate Surges to 10.21%
Bank of Korea: "Need for Debt Restructuring Including New Start Fund"

Inside a closed store in Insadong, Jongno-gu, Seoul, loan-related flyers are placed. Photo by Jinhyung Kang aymsdream@

The delinquency rate on loans for self-employed individuals has been rising sharply. In particular, the delinquency rate among vulnerable self-employed borrowers with insufficient repayment capacity is increasing rapidly, highlighting the need for government-level support such as debt restructuring.

According to the '2024 First Half Financial Stability Report' released by the Bank of Korea on the 26th, since the second half of 2022, the delinquency rate on loans for the self-employed has been rising more steeply than the delinquency rate on household loans.

The delinquency rate on loans for the self-employed rose from 0.5% at the end of Q2 2022 to 1.52% at the end of Q1 this year. In comparison, the household loan delinquency rate increased from 0.56% to 0.98% during the same period, indicating a steeper rise in the delinquency rate for the self-employed.

Especially, the delinquency rate among vulnerable self-employed borrowers with insufficient repayment capacity surged from 3.96% at the end of Q2 2022 to 10.21% at the end of Q1 this year. The proportion of vulnerable borrowers among the self-employed reached 12.7% at the end of Q1 this year, significantly exceeding the 6.4% proportion among general households. Vulnerable borrowers are defined as those who are multiple debtors and either low-income (within the bottom 30%) or have low credit ratings (grades 7?10).

Both households and the self-employed have recently experienced rising delinquency rates, which the Bank of Korea attributes more to an increase in the number of delinquent borrowers rather than the average delinquent amount. In particular, the number of newly delinquent borrowers has increased, and these borrowers have been maintaining delinquency for a considerable period.

The average delinquent amount per delinquent borrower among households and the self-employed was 122 million KRW at the end of Q1 this year, not significantly different from 104 million KRW in Q2 2022. However, during the same period, the proportion of delinquent borrowers rose from 1.72% to 2.31% for households and from 1.57% to 4.20% for the self-employed.

The new delinquency entry rates for households and the self-employed were 0.63% and 1.52%, respectively, at the end of Q1 this year, up from 0.43% and 0.47% at the end of Q4 2021. The delinquency persistence rates also remain high for both households (76.2% at the end of Q1 this year) and the self-employed (74.6%).

A notable feature is that during the recent two-year interest rate hike period, the delinquency rate on loans for the self-employed has risen more steeply compared to previous interest rate hike periods.

This is attributed to the relatively large increase in loan interest rates and the contraction of the service industry economy, which differs from the past. Considering that the main collateral for self-employed loans is commercial real estate, the sluggish commercial real estate market is also believed by the Bank of Korea to have somewhat contributed to the recent rise in delinquency rates.

A Bank of Korea official emphasized, "Since the pressure for rising delinquency rates is expected to continue mainly among the self-employed for the time being, financial authorities need to actively promote debt restructuring through programs such as the New Start Fund for self-employed individuals whose repayment capacity has significantly deteriorated or who have no prospects for recovery."

The New Start Fund is a debt adjustment program operated by the government with a scale of up to 30 trillion KRW, targeting self-employed individuals affected by COVID-19. From this year, the eligibility criteria related to COVID-19 damage have been removed, expanding the scope of support. The Bank of Korea official added, "Monitoring the impact of changes in the financial soundness of household and self-employed borrowers on financial institutions should also be strengthened."