[Financial Stability Report] Self-Employed Loan Delinquency Rate Hits 10-Year High... Non-Bank Rate Seven Times Higher Than Banks

Debt Repayment Capacity Weakens as Income Declines... DSR Turns Upward
Cited as a Reason for Slow Improvement in Non-Bank Delinquency Rates

The delinquency rate on loans taken out by self-employed individuals has been worsening, particularly among non-bank lenders and vulnerable self-employed borrowers. As their income declines, their debt repayment capacity is also weakening. Analysts point out that this is a major factor slowing improvements in delinquency rates at non-bank deposit-taking institutions such as savings banks and mutual finance companies.

Delinquency Rate Hits 10-Year High... Debt Repayment Capacity Further Weakens

According to the Financial Stability Report released by the Bank of Korea on June 25, the delinquency rate on loans to self-employed individuals reached 1.88% in the first quarter of this year, the highest in 10 years since the first quarter of 2015 (2.05%). The rate has been steadily rising since the second quarter of 2020 (0.51%) and is now above the long-term average of 1.39% since 2012. The Bank of Korea identifies borrowers with individual business loans as self-employed and estimates the total amount of loans to the self-employed by including their household loans as well.

Breaking down the delinquency rate by type of lender, the rate for non-bank loans was 3.92%, while that for banks was 0.53%, a difference of sevenfold. Among vulnerable self-employed borrowers?those who are multiple debtors and either low-credit or low-income?the delinquency rate was 12.24%, showing a significant gap compared to non-vulnerable self-employed borrowers (0.46%). The non-bank loan delinquency rate is at its highest since the third quarter of 2015 (4.6%), and the delinquency rate among vulnerable self-employed borrowers is the highest since the second quarter of 2013 (13.54%).

The problem is that even though the delinquency rate is at its highest since 2015, debt repayment capacity is actually deteriorating. When the Bank of Korea compared the financial situation of self-employed households to that of non-self-employed households, it found that self-employed households have more debt than financial assets, resulting in a net financial debt position. This means their principal and interest repayment burden is greater than that of non-self-employed households.

The ability to repay debt relative to income is also weakening compared to non-self-employed households. An analysis of the debt service ratio (DSR) trends showed that the DSR for self-employed households was 34.9% last year, up 2.7 percentage points from the previous year. In contrast, the DSR for non-self-employed households decreased by 2.3 percentage points to 27.4%. A higher DSR means a greater share of income is used to repay debt.

It was found that 3.2% of self-employed households are high-risk households, with weak repayment capacity in terms of both assets and income. When looking at the proportion of high-risk households based on financial debt held, self-employed households (6.2%) had a higher share than non-self-employed households (4.4%), indicating that the risk of financial debt default is relatively higher among the self-employed, according to the Bank of Korea.

The Bank of Korea stated, "Although the burden of interest payments for the self-employed is expected to gradually ease as policy rate cuts are reflected with a time lag, the slow recovery in income may limit the speed of improvement." The Bank added, "It is necessary to strengthen micro-level policies to support income recovery, such as debt restructuring and reemployment support when needed, taking into account individual circumstances such as repayment capacity and business conditions of the self-employed."

Rising Delinquency Rate Among Self-Employed Hampers Non-Bank Delinquency Improvement Despite Rate Cuts

The high delinquency rate among the self-employed has been cited as a key reason for the slow improvement in delinquency rates at non-bank institutions such as savings banks and mutual finance companies.

The Bank of Korea analyzed the reasons for the slow pace of improvement in delinquency rates despite policy rate cuts and found that, unlike in past rate cut cycles, both the delinquent amounts for individual business owners and vulnerable household borrowers have increased during the current period (October 2024 to March 2025). The amount of delinquent loans to individual business owners at savings banks increased by 3.8%, while at mutual finance companies it rose by 21.5%.

The Bank of Korea explained, "The amount of principal and interest repayments by non-bank borrowers has increased significantly compared to previous rate cut cycles, mainly due to persistently high lending rates. In addition, the slow improvement in income conditions has led to a continued rise in new delinquency rates." The Bank also pointed out that the reduced growth in new lending, resulting from strengthened asset quality management, is another factor delaying improvements in delinquency rates.

The increased share of loans to economically sensitive companies and vulnerable household borrowers can further contribute to rising delinquency rates. Loans to economically sensitive companies by non-banks grew from 86 trillion won at the end of 2022 to 103 trillion won in the first quarter of this year, with their share of total corporate loans rising from 16% to 21.9%. The Bank of Korea noted, "Economically sensitive companies tend to have a high proportion of small business owners and strong demand for short-term working capital, making them highly responsive to economic fluctuations." The Bank added, "Given the ongoing economic slowdown, it is necessary to closely monitor trends in delinquency rates and market impacts and to manage delinquency rates even more proactively."