Household, self-employed debt raises alarm as BOK lifts key rate to 3%
Summary
The Bank of Korea’s rate hike to 3 percent is deepening concerns over household and self-employed debt in South Korea. Delinquency rates are at record highs, and total household credit has topped 2,000 trillion won for the first time. The central bank says the financial vulnerability index may exceed its long-term average in September. The government plans debt support measures for small business owners, while some experts want broader economic fixes.
Key Facts
- The BOK raised its benchmark rate by 0.25 percentage points to 3 percent at Thursday’s policy meeting, marking a second consecutive hike after July.
- Loans held by self-employed borrowers totaled 1,095 trillion won at the end of the first quarter, the highest level since the related statistics began in 2012.
- Total household credit reached 2,019.8 trillion won at the end of the second quarter, up 25.9 trillion won from the previous quarter and above 2,000 trillion won for the first time.
- The BOK estimated that a 0.25-percentage-point rise in lending rates would add 1.8 trillion won to the annual interest burden of self-employed borrowers, or about 560,000 won per borrower.
- The Ministry of Finance and Economy said 154.7 trillion won out of 358.7 trillion won in pandemic-era loans to individual business owners remained outstanding.
Gov't offers debt relief to small biz owners struggling to repay COVID-era loans
Restaurant and bar signs are seen along an alley in Jongno District, Seoul, Aug 17. Newsis
The Bank of Korea's (BOK) recent decision to raise its policy rate to 3 percent is increasing concerns over the financial stability of already vulnerable borrowers, including the self-employed, analysts said Sunday.
Delinquency rates have climbed to record highs, while total household debt has surpassed 2,000 trillion won ($1.45 trillion) for the first time. With a large share of these loans carrying variable rates, higher borrowing costs could put further strain on vulnerable borrowers and increase the risk of defaults.
The central bank raised its benchmark rate by 0.25 percentage points to 3 percent at Thursday's policy meeting, marking the second consecutive hike following its July increase.
The impact is likely to be particularly burdensome for self-employed borrowers, as both outstanding debt and delinquent loans have reached record highs, while delinquency rates have climbed to alarming levels, raising concerns that the rate hike could further increase their interest burden and the risk of defaults.
"My loan interest rate is already at 6 percent, and it looks like it could go even higher following the latest rate hike," one user wrote on a Naver online community for self-employed individuals. "With sales already declining, I'm afraid this could force me to close my business."
According to BOK data, loans held by self-employed borrowers totaled 1,095 trillion won at the end of the first quarter, up 2.6 trillion won from the end of last year and marking the highest level since related statistics began in 2012.
The BOK estimated 1.6 million self-employed borrowers are multiple debtors, meaning they had three or more loans across household and business lending. Their combined debt amounted to 645 trillion won.
Delinquencies among small business owners have also reached record levels. Overdue loans among them rose to 22.3 trillion won at the end of the first quarter, up 2 trillion won from the end of last year.
The delinquency rate, meanwhile, climbed to 2.04 percent from 1.86 percent, its highest level since it reached 2.08 percent in 2015.
The latest rate hike is expected to add further pressure on heavily indebted borrowers.
The BOK estimated that a 0.25-percentage-point increase in lending rates would add 1.8 trillion won to the annual interest burden of self-employed borrowers, or about 560,000 won per borrower, assuming that around 65.5 percent of their loans carry variable rates.
A customer speaks with a bank official in Seoul, Aug. 5. Yonhap
Household debt poses another major concern, with total household credit standing at 2,019.8 trillion won as of the end of the second quarter, up 25.9 trillion won from the previous quarter. The figure surpassed the 2,000 trillion-won mark for the first time since the BOK began compiling the statistics in 2002.
The quarterly increase was also the largest since the third quarter of 2021, when household credit rose by 34.8 trillion won.
Amid growing default risks among vulnerable borrowers, the central bank is keeping a close watch on their debt burden.
BOK Gov. Shin Hyun-song said the financial vulnerability index, which measures the buildup of risks across asset prices, credit and financial institutions, is expected to exceed its long-term average in the central bank's September financial stability report, describing the potential reading as a matter of "considerable concern."
"We are communicating closely with the government on the matter. Measures to support vulnerable borrowers were included in the government's second-half economic growth plan," Shin said during a press conference Thursday.
The Ministry of Finance and Economy also vowed to offer a debt relief program for small business owners still struggling with loans taken out during the COVID-19 pandemic, with detailed measures to be announced later this year following a review.
According to ministry data, a total of 358.7 trillion won in loans was extended to individual business owners during the pandemic, of which 154.7 trillion won, or 43.1 percent, remains outstanding.
But experts say more fundamental measures are needed rather than one-off debt relief.
"Widespread debt write-offs could create the perception that borrowers can ultimately have their debts forgiven even if they fall behind on payments," said Yang Joon-mo, a professor of economics at Yonsei University.
"The government should pursue fundamental measures to boost domestic demand and revitalize the economy," he added.
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