Rising Rates and Financial Stress
The Bank of Korea lifted its policy rate to 3 percent on Thursday. This marks the second consecutive increase this summer. The move aims to curb economic pressures but creates immediate strain for households and small business owners across the country. Financial analysts now point to record delinquency rates as evidence of a cooling economy.
Total household debt crossed the 2,000 trillion won threshold for the first time since records began in 2002. As of the second quarter, total credit stood at 2,019.8 trillion won. That is an increase of 25.9 trillion won in just three months. This quarterly jump is the largest since 2021.
The Plight of Self-Employed Borrowers
Self-employed individuals face the highest risks from these borrowing costs. Loan balances for this group reached 1,095 trillion won by the end of March. This is the highest level since the central bank started tracking these statistics in 2012. Many business owners are now struggling to service multiple loans simultaneously.
There are 1.6 million self-employed people who carry three or more loans. Their combined debt load hit 645 trillion won. Delinquencies in this sector rose to 22.3 trillion won, an increase of 2 trillion won compared to the end of last year. The delinquency rate reached 2.04 percent. This figure is the highest reported since 2015.
One small business owner shared their concerns on a public forum. They noted their current interest rate sits at 6 percent. With falling sales and rising costs, many fear they must shutter their doors permanently. The central bank estimates that a 0.25-percentage-point hike adds 1.8 trillion won to the annual interest bill for these borrowers. That equals 560,000 won in additional annual costs for each individual.
Government Response and Economic Outlook
Bank of Korea Governor Shin Hyun-song expressed caution regarding the current stability index. He noted that risk levels across asset prices and credit markets will likely exceed the long-term average in the upcoming September financial report. He described the situation as a matter of considerable concern.
Officials are coordinating with the finance ministry to address these risks. The ministry plans to introduce a debt relief program for loans originating during the pandemic. Approximately 154.7 trillion won of these specific pandemic-era loans remain outstanding today.
Some economists argue that temporary relief is not the answer. Yang Joon-mo, an economics professor at Yonsei University, warned against mass debt write-offs. He suggested that such actions might create moral hazard. Borrowers might start to believe that their debts will eventually be forgiven regardless of payment habits. He advocates for policies that grow domestic demand instead. Unless the economy finds a way to move goods and services more effectively, debt service will remain the primary burden for millions of workers.