What’s worse than household debt

Debt from self-employed individuals ballooned to over 500 trillion won ($439 billion). According to Financial Supervisory Service data compiled from rating agencies, about 1.5 million self-employed borrowers were indebted by 520 trillion won as of the end of last year, up 60 trillion won from a year ago.

The financial authority will be scrutinizing mutual savings institutions from this week on their loan status to self-employed clients.

Debt held by self-employed individuals is as explosive as household debt. Their debt share has been underestimated because of overwhelming household debt of nearly 1,400 trillion won. Their loans are categorized under small- and mid-sized business segment although they are as risky as consumer loans. Their debt has been financed for expensive medical equipment leases in private clinics and purchases of properties by retirees.

The bulk, however, goes to sustain mom-and-pop stores. The loans therefore should come under specific categorization such as for enterprises, investment, or primary income.

Starting a business or opening a shop is inevitable amid job insecurity from the slow-moving economy with less contribution to hiring. Opening up a business or store without thorough preparation could hurt the balance sheet and make merchants turn to quick and dangerous loans. Their debt levels therefore could be more risky than mortgage-backed household loans. According to the Bank of Korea, the debt-service coverage ratio of self-employed borrowers was 42 percent, compared with 31 percent for debtors who are on a permanent payroll.

Local interest rates are ready to go up due to another rate hike by the U.S. interest rates. Since mom-and-pop stores are exposed to sluggish domestic demand, slight increase in interest rates would aggravate their livelihood. They pose a bigger danger to the economy as they owe more to high-interest non-banking sector because of their lacking credit.

The over 500 trillion won debt by self-employed individuals could increase the poor and shake the financial system. The government must include specified measures to address debt by the self-employed in the comprehensive package on household debt it will release in August.

JoongAng Ilbo, June 26, Page 30