65% of new loans issued to self-employed owners
By Kim Tae-jong
Loans extended to self-employed business owners are fast increasing, in terms of both the number of people taking them out and the amount of money they are borrowing.
This is posing a threat to the financial soundness of domestic banks. Lenders have channeled most of their new loans into this sector as a result of the financial regulator’s attempts to control household debt.
Market experts say that such loans run a high risk of going sour because the prolonged economic slump caused by external woes has already dealt a blow to independent businesses.
According to industry sources, outstanding loans to the self-employed by six major banks such as KB Kookmin Bank, Shinhan Bank and Woori Bank stood at 135.2 trillion won as of the end of June, up 6.4 trillion won from the end of last year.
But the problem is the portion of loans lent to small- and medium-sized businesses, as this accounts for 64.4 percent of all loans issued in the first six months. During this period, the sum total of outstanding loans at the six banks increased to 9.9 trillion won.
The number of loans given to the self-employed is fast increasing, with the rate seven-times higher than that of household loans.
The default rate of loans to the self-employed is also rapidly increasing. It currently stands at 1.17 percent, up from 0.8 percent at the end of last year.
“It’s true that loans to the self-employed have been on a steady increase,” a bank official said. “We believe this is because there has been an increase in the number of self-employed people in recent years due to early retirements.”
But market insiders said that local banks have aggressively increased loans to the self-employed because household loans have been shrinking due to the government’s strengthened regulations.
Experts also point out that lenders’ heavy reliance on loans to the self-employed should be regarded as a ticking time bomb, that could pose a serious threat to the economy as well as to the banks.
According to the LG Economic Research Institute, over 50 percent of borrowers with multiple loans are self-employed.
Their default rate stood at 1.82 percent as of May, much higher than that of salaried workers with multiple loans at 1.24 percent.
“The self-employed tend to be less able to repay their debt than salaried workers,” an official from the institute said. “They can easily become defaulters amid the prolonged recession, which can pose a threat to the economy.”
The number of self-employed people has been rising since 2005 due to the retirement of baby boomers born between 1955 and 1963.
The number of baby boomers in the country is around 7.1 million, making up 15 percent of the population. Their generation will see mass retirements within five to 10 years, but they will have to live on their own resources for the next 30 or 40 years.
They are turning to entrepreneurship after retirement due to the lack of a social welfare safety net and decent jobs for the elderly.
According to recent statistics, four out of five self-employed people here are running small businesses to make a subsistence level income.
But the market is already saturated with self-employed workers, with too many corner shops and restaurants across the country. The consequence is many who start their own business close down after losing money.
According to data released by the Korea Foodservice Industry Association last year, 16.2 percent of restaurants closed down within one year of opening, and 66.5 percent within three years. A total of 298,758 restaurants shut last year.
The LG Economic Research Institute noted that the self-employed tend to heavily rely on low value-added business, which leads them to face more financial problems.
“As the demand for such businesses is decreasing, the self-employed will face difficulties in the latter half of the year with many of them going bankrupt, causing related issues,” the official from the institute said.
He suggested there should be more regulations on loans to the self-employed, more appropriation funds for bad borrowers, more support for high value-added business for the self-employed and more job-sharing programs.