Five years ago, Kim (55) opened a clothing store in Dongdaemun, Seoul. Shortly after, the coronavirus pandemic forced him to rely on bank loans. Despite accruing 130 million won in debt, government support kept interest rates at 1-2%, preventing severe financial strain. But even after the pandemic, sales remained sluggish, and Kim had to turn to mutual finance companies and private lenders, accumulating an additional 40 million won in debt at interest rates over 10%. “I thought things would improve after the pandemic, but all I have left is debt,” Kim said. He has since applied for the New Start Fund, a debt restructuring program for self-employed and micro-enterprises.
Recent data shows a sharp rise in delinquency rates among small business loans, especially affecting vulnerable borrowers like Kim. The proportion of delinquent borrowers among small business owners is at its highest in 11 years since 2013. In a report released on June 26, the Bank of Korea emphasized the need for proactive debt restructuring for those with significantly reduced repayment capacities or no prospects of recovery.
According to the BOK’s Financial Stability Report for the first half of this year, the delinquency rate for small business loans surged from 0.5% at the end of the second quarter of 2022 to 1.52% by the end of the first quarter this year. This increase is nearly three times higher than the rise in the overall household loan delinquency rate, which grew from 0.49% to 0.84% during the same period. Delinquent borrowers often remain in default for extended periods or repeatedly fall behind on payments.
The proportion of small business owners unable to repay their loans hit 4.2%, the highest since the first quarter of 2013 (4.37%). The financial crisis of 2013 saw similar economic conditions, with domestic demand shrinking and many baby boomers starting food-related businesses after retirement, worsening income conditions for small business owners.
Since the end of the second quarter of 2022, immediately following the pandemic, the delinquency rate among self-employed businesses has risen sharply from 1.57% to 4.2%, affecting one in every 24 small business loan holders, compared to one in 64 previously.
The outstanding balance of small business loans by the end of the first quarter this year was 1,055.9 trillion won, up 50% from four years ago, before the pandemic. Both the volume and quality of debt have deteriorated, with delinquency rates among low-income or low-credit multiple-debt holders rising rapidly to 10.21% by the end of the first quarter. Vulnerable borrowers among small business owners stand at 12.7%, nearly double that of households (6.4%). This trend is attributed to prolonged high-interest rates and the arrival of deferred loan repayment demands due to the pandemic. Government support measures, including principal and interest repayment deferrals for SMEs and small business owners, concluded last year, with further loan maturity extensions set to end sequentially.
