Dangerous lending practices

Bank lending to self-employed businessmen reached 229.7 trillion won ($194 billion) as of the end of last month, increasing by 20.4 trillion won over the last eight months. The growth is tantamount to nearly half of the increase in mortgage-backed debt during the same period and is even bigger than the full-year growth in 2007 when loans to self-employed individuals had been record-high. The loan's monthly rise in July was all-time high.

Self-employed business poses a chronic dilemma for the Korean economy. Self-employed individuals take up more than 26 percent of the country's working population. Korea's self-employed share is the biggest among members of the Organization for Economic Cooperation and Development after Turkey, Greece and Mexico that rely heavily on tourism industry among other things. Due to oversupply and heavy competition, just one out of six businesses manages to survive for 10 years. The number of self-employed businessmen reached 3.98 million in the first half, the lowest in 20 years.

Prospects for the self-employed business are also murkier. Productivity of the services sector where most self-employed businesses are engaged is just half of the manufacturing sector. People start businesses - mostly dining industry - not to earn big money but to survive, because they have no other jobs to turn to. Such types of businesses take up 80 percent at maximum of total self-employed category. The business is doing poorly due to prolonged sluggishness in domestic demand and a fast ageing of populations.

The spike in loans to such businesses amid poor economy is worrisome as it suggests that how bad most of them are doing. If the loans sour, they could trigger domino explosion in household debt that has already exceeded 1,100 trillion won. Half of mortgage-backed loans are being sought not to buy homes but to sustain household and family business. In other words, they are lent for the same purpose as self-employed businesses. The two fall under the same debt category. Loans for self-employed individuals are more dangerous as they are lent in greater sum per person - and on higher interest rates - than household debts.

Banks and other financial institutions lend money to self-employed businessmen without thorough scrutiny on their business prospects and viability because liquidity is easy under government policy. But loans to self-employed businesses must be reviewed under stricter guidelines. At the same time, the government must accelerate structural reforms to increase jobs and revive domestic demand.

JoongAng Ilbo, Sept. 14, Page 34