Loans could be coming due for small businesses, or not

Amid growing concern over the spread of the Omicron variant and interest rate hikes, the Financial Services Commission asked lenders to shore up their bad debt reserves and brace for a potential loan crisis.

Gwangjang Market in Jongno District, central Seoul, has only few customers on Thursday. The Covid-19 pandemic, which started exactly two years ago in Korea, has taken a toll on small businesses. [YONHAP]

The self-employed and small business owners are going to feel debt pressure as a government support program approaches its end.

In the wake of the Covid-19 pandemic, the government suspended loan repayments by the self-employed and small business owners.

First implemented in April 2020, the support measures were extended three times, most recently last September.

The program is set to end in March, and no extension has beendecided upon.

Amid growing concern over the spread of the Omicron variant and interest rate hikes, the Financial Services Commission (FSC) asked lenders to shore up their bad debt reserves and brace for a potential loan crisis.

“The public health crisis led to a small business crisis,” said FSC Chairman Koh Seung-beom during a meeting about borrowings by the self-employed on Wednesday.

“Financial risks will go up if the loan market freezes due to the sluggish economic recovery of small-sized businesses and interest rate hikes.”

With the termination of the support program only a few weeks ahead, the FSC said it will consider another extension.

“The loan maturity extension and repayment delay will be over by the end of March, but we will consider various factors such as the pandemic situation and financial soundness before making a final decision,” said Koh.

The amount of debt held by the self-employed shot up during the pandemic.

According to the Bank of Korea (BOK), the self-employed and small business owners borrowed a total of 887.5 trillion won as of last September, a 29.6 percent increase from the end of 2019.

That pace is faster than the growth in household debt, which was 15 percent during the same period.

The problem lies in not only the quantity but also the quality of loans.

The number of individual business owners who borrowed money from more than two lenders has seen a sharp increase over the last two years.

A total of 272,308 individual business owners were indebted to three or morelenders as of last November, double the 128,799 in 2019, according to a report released Tuesday by the office of Rep. Yun Chang-hyun of the main opposition People Power Party.

The amount they owe rose from 101 trillion to 157 trillion won in the same period.

The interest rate hike announced on Jan. 14 is bound to put heavy pressure on the self-employed.

Loans extended to the self-employed and small business owners tend to have short maturities with floating interest rates.

As of last September, 69.8 percent of the total loans held by individual business owners were to mature in a year, according to a BOK report published on Dec. 23.

“Though most of the debts will be repaid without problem, five to 10 percent of the total loans might cause some issues,” said a spokesperson for the financial authority.

BY AHN HYO-SUNG [shin.hanee@joongang.co.kr]