Tackle the debt crisis of the self-employed

Concerns about the loan balance of the self-employed are deepening quickly as their outstanding balance is worsening steeply. Small business operators’ ability to repay their debts has already reached its limits. They struggled to survive the high interest rate, economic slowdown and decreased consumption starting from the Covid-19 pandemic. But according to the Nice Information Service, a credit information provider, the outstanding balance of the 3.36 million self-employed already reached 1,109.7 trillion won ($832.8 billion) last year when combining their personal and business loans. In just a year, their loans increased 2.5 percent and the number of borrowers 2.6 percent.

Also worrisome is the rapid pace of their debt arrears. The amount of arrears for more than three months soared to 27.38 trillion won, a whopping 49.7 percent increase from a year ago. Their default rate of 2.47 in 2023 rose by 0.8 percentage points from the previous year. To make matters worse, nearly a half of those independent businessmen, or 1.73 million, were multiple debtors who borrowed money from more than three financial institutions.

The rapid increase in their default rate partly resulted from the government’s decision to end the principal repayment suspension for the self-employed. In April 2020, the government allowed them to postpone the repayment of principal. Thanks to the move, they could extend the maturity by September 2025, but the government’s suspension of the principal repayment already ended last September. As a result, their financial burdens have started to surface.

The self-employed can suffer more from soaring labor costs and shrinking consumption amid an economic slowdown and high interest rate. Some say that the current plight is even worse than during the 1997-98 Asian financial crisis. A public fund has already handed out as much as 1.26 trillion won to the defunct self-employed, the highest amount to date.

But such makeshift measures aimed at helping self-owned businesses stay afloat cannot fundamentally solve their problem. The ratio of the surviving self-employed is not so high. In 2021, only 23 percent managed to do business up to five years.

To effectively solve the conundrum, the government must accelerate the restructuring of the saturated self-employed sector while devising a tailored repayment schedule for them. At the same time, the government must help underperforming self-owned businesses close and help their owners get a new job through education and other programs. The government must review the weird system of blocking SMEs from growing into large companies if it really wants to help create more jobs at large companies, as the Korea Development Institute pointed out recently.