As market rates keep rising, the debt repayment burden on the self-employed is growing quickly. There are also concerns that the rise in rates could spill over into a financial soundness problem because of the structure's high share of vulnerable borrowers.
On the 29th, according to data the Bank of Korea (BOK) submitted to Park Sung-hoon of the People Power Party, if the lending rate rises by 0.25 percentage point (p), the total interest burden on the self-employed is estimated to increase by about 1.8 trillion won. The average annual burden per person also rises by 550,000 won. If rates rise by 0.50%p and 0.75%p, the additional interest burden expands to 3.5 trillion won and 5.3 trillion won, respectively.
The scale of loans to the self-employed is already at a record high. As of the end of last year, the outstanding balance was 1,092.9 trillion won, a slight increase from a year earlier. Of this, business loans increased while household loans declined.
The problem is the share of vulnerable borrowers. Multi-debtors who have borrowed from multiple financial institutions account for about 60% of the total, and their loan size is also considerable. If rates rise by 0.25%p, the interest burden on multi-debtors alone increases by 1.1 trillion won, and as the rate hike grows, the burden expands rapidly.
However, market rates have recently continued to rise. Although the BOK has kept the base rate on hold since May last year, the new lending rate at deposit banks was an annualized 4.26% in February this year, marking a rise for four straight months since October last year (4.02%). With external uncertainty growing amid heightened tensions in the Middle East, anxiety over the future rate path has also increased.
Delinquency rates also show a clear upward trend. As of the end of last year, the delinquency rate for low-income self-employed was 2.00%, up 0.19%p from a year earlier (1.81%). For middle-income self-employed it rose 0.21%p to 3.45%, and for high-income self-employed it rose 0.17%p to 1.41%. Given that the share of the self-employed is 22.9%, far above the average of major countries (16.6%), some note that vigilance is needed over the potential for a widening of bad debts.
Accordingly, voices are growing that a more fundamental response is needed, not merely an extension of simple financial support, including targeted support for vulnerable borrowers and restructuring for businesses with low prospects for rehabilitation.