The troubles of the self-employed, which make up a quarter of Korea’s working population, could pose a financial and social risk as debt in the segment is expected to top 600 trillion won ($53.4 billion) this year amid business slowdown and higher wages.
According to data from the Bank of Korea on Monday, the combined debt of self-employed individuals reached 590.7 trillion won as of the end of June, adding 7.5 percent or 41.5 trillion won from December last year.
Experts warn of twin tail risks from debt held by mom-and-pop businesses together with the record-high household debt of 1,500 trillion won should they go sour once interest rates move up.
The dangers have already surfaced. The delinquency rate for restaurants was 0.47 percent as of the second quarter, up 0.02 percentage point from the same period a year ago. For the retail sector, the rate was up 0.06 percentage point to 0.42 percent. A delinquency rate is generally low when debt balance increases fast, but the latest trend indicates that the number of the insolvent self-employed has been rapidly increasing in the country.
The share of poor credit-holders among the self-employed also has been on a steep rise. Those owing credit to more than two second-tier lenders that charge high interest rates or those with borrowings from five or more institutions reached 148,000 as of March this year, compared with 98,000 in late 2014.
According on a BOK study in 2017, an 0.1 percent rise in lending rate raises the chance of a business shutdown for the self-employed by 7 to 10.6 percent.
Self-employed businesses were among the hardest hit from the double-digit increase in minimum wage. Later this month, the central bank is expected to raise the benchmark rate, which has stayed unchanged for a year at 1.50 percent, amid criticism over the negative effects from the protracted low-interest environment and faster rises in U.S. interest rates.
By Lee Seung-yoon and Kim Hyo-jin
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