Loans extended to self-employed individuals in Korea at record high in Q1

The outstanding amount of loans extended by financial institutions to self-employed people in South Korea reached an all-time high in March, raising concerns about a rise in the delinquency rate that has already surpassed 1 percent, data showed Monday.

According to data submitted by the Bank of Korea to Representative Yang Kyung-sook of the Democratic Party, the total amount of money borrowed by self-employed people reached an all-time high of 1,033.7 trillion won ($793 billion) as of the end of March. The amount is up 13.9 trillion won from three months ago.

The delinquency rate has also gone up sharply this year compared to last year.

The overall delinquency rate for self-employed individuals stood at 1 percent in the first quarter, up 0.35 percentage point from 0.65 percent in the fourth quarter of last year.

The increase is also higher than 0.12 percentage point rise in the fourth quarter and 0.06 percentage point in the third quarter.

The 1 percent delinquency rate is higher than 0.76 percent in the fourth quarter of 2019, before the Covid-19 outbreak, and the highest since 1.13 percent in the first quarter of 2015.

The delinquent amount also rose to 6.3 trillion won in the first quarter, up 53.7percent from 4.1 trillion won in the fourth quarter. The increase is more than double that of 24.2 percent in the fourth quarter.

The BOK data projected that the total amount of interest payment by the self-employed people goes up by 1.8 trillion won when the base rate rises by 25 basis points based on the loan amount and estimated share of variable interest rate.

It is estimated that the annual interest is expected to go up by 580,000 won per self-employed individual.

The delinquency rate for the bottom 30 percent income bracket increased by 0.4 percentage point to 1.6 percent in the first quarter from 1.2 percent in the fourth quarter, marking the highest in more than three years.

[Image source: Gettyimagesbank]

The delinquency rate for the middle-income group also rose by 0.5 percentage point during the same period to 1.8 percent.

The figure for the upper 30 percent bracket was 0.9 percent, also the highest in more than three years since 2019.

Despite the rising delinquency rates, self-employed borrowers across all income brackets continued to borrow more money.

The balance of loans of self-employed borrowers in the low-income bracket went up by 3.1 trillion won to 123 trillion won in the first quarter from 119.9 trillion in the fourth quarter of 2022.

The balance of high-income and middle-income groups increased by 9.7 trillion won and 1.2 trillion won, respectively.

The figures were all record-highs.

The delinquency rate of non-bank financial sector loans was particularly high.

The delinquency rate for loans to self-employed from banks and non-banks were 0.37 percent and 2.52 percent, respectively, up by 0.11 percentage point and 0.92 percentage point.

In the non-banking sector, the delinquency rate of mutual banks stood at 2.22 percent in the first quarter, insurance companies 0.69 percent, savings banks 5.17 percent, and credit loan companies 1.66 percent, data showed.

The loan balance of self-employed borrowers with multiple loans, or those with more than three loans from different institutions, also stood at 737.5 trillion won, up 2.4 percent from the fourth quarter. They also accounted for an all-time high of 71.3 percent of the entire self-employed loans, up from 70.6 percent in the previous quarter.

“The overall quality of self-employed debt has deteriorated, with an increase mainly among vulnerable borrowers and non-banking organizations,” the BOK said in a report.

The report warned against potential growth in defaults among the self-employed, citing slower-than-expected economic recovery.

The central bank projected that the delinquency risk for self-employed loans will rise to 3.1 percent by the end of this year.