Delinquency rate surges to 8-year high among self-employed

By Yi Whan-woo

Once a personal trainer for several celebrities, Kim, a man in his mid-30s, plans to shut down his fitness club in Seoul's affluent Gangnam district after being diagnosed with stomach cancer as he struggled to pay back bank loans.

“The doctor said the cancer is mainly due to extreme stress,” Kim, who refused to give his full name, said, adding, “My business still has not recovered from the pandemic while I have billions of won to repay after borrowing the money from multiple banks.

Kim is among the self-employed business people in Korea who virtually had no income when social distancing regulations were strictly enforced during the height of the COVID-19 pandemic.

They desperately borrowed money from banks to pay office rent and also to support themselves financially. And many of them are now left with massive outstanding loans, which, according to Kim, “are at an unbearable level.”

Under the government's relief program, borrowers like Kim were granted a delay in paying back principal and interest until September.

Whether such protective measures will last, however, remains uncertain considering the government declared an end to COVID-19 emergency measures in May.

According to data compiled by the Bank of Korea (BOK) and released by Rep. Yang Kyung-sook of the main opposition Democratic Party of Korea (DPK), self-employed business people nationwide had an outstanding balance of loans worth 1,033.7 trillion won ($790 billion) by the end of the first quarter of 2023.

The amount surpassed the 1,000 trillion won mark for the third consecutive quarter. The amount stood at 1,014.2 trillion won in the third quarter and 1,019.9 trillion won in the fourth quarter of 2022.

Correspondingly, the risk of defaults has grown over time and the delinquency rate of self-employed people across all financial institutions advanced to 1 percent in the first quarter, well above the previous quarter's 0.65 percent.

The rate marked the highest level since the third quarter of 2015 at 1.13 percent. The total overdue amount during the first quarter stood at 6.3 trillion won.

What is of greater concern is that the borrowers took out money from multiple financial institutions, including second-tier banks and credit card companies.

These lenders deal with people who have a relatively low crediting rating due to their income or other payment capabilities and were thus rejected by first-tier banks when looking to take out loans. As a result, the second-tier lenders offer loans at higher interest rates.

The outstanding balance of those who have multiple loans amounted to 737.5 trillion won in the first quarter, up 2.4 percent from three months ago.

By company, the delinquency rate of self-employed people was 0.37 percent at banks, but 2.52 percent for the second-tier lenders other than banks.

“This suggests that borrowers are finding it tougher to repay second-tier lenders that offer loans at higher interest rates,” an industry source said.