Small business owners in South Korea are increasingly resorting to government funding to repay loans as they are not capable of managing soaring interest rates, sparking concerns about loan defaults among the self-employed individuals.

According to data obtained by Yang Jung-suk, an independent lawmaker, from the Credit Guarantee Foundation on Wednesday, the default rate for small business loans guaranteed by 17 regional credit guarantee foundations nationwide ranged from 1.8 percent to 4.9 percent as of March, up from 0.3 percent to 1.5 percent last year.

The figures are also overwhelmingly high when compared with 1.3 percent~3.5 percent in 2019.

The Credit Guarantee Foundation provides credit guarantees for self-employed individuals and small business owners to facilitate their access to funds from banks.

There are 17 regional credit guarantee foundations and small business owners receive loans from banks based on the loan guarantee certificates issued by these regional foundations. If a small business owner fails to repay the loan, the regional credit guarantee foundation covers the repayment proportionate to the guarantee ratio.

North Jeolla Province had the highest default rate at 4.9 percent, followed by North Gyeongsang Province at 3.9 percent, Incheon at 3.8 percent, Daegu at 3.7 percent, Busan at 3.0 percent, and Seoul and South Gyeongsang Province at 2.7 percent each.

Seoul Credit Guarantee Foundation, which has the highest number of loan cases and amounts for small business owners, had a default rate ranging from 0.6 percent to 1.1 percent in the past three years, but it increased by more than 3 times in March this year.

Sejong Credit Guarantee Foundation had a default rate of 2.1 percent, which is up 7.9 times compared to last year’s rate of 0.3 percent.

A high default rate indicates that the economic conditions have deteriorated to the extent that local business owners cannot repay their debts.

The amount of default repayments at the 17 regional credit guarantee foundations reached 315.2 billion won ($247.2 million) as of March, accounting for 62 percent of the entire amount for the previous year (509.5 billion won).

The repayment capacity of small business owners worsened following the Bank of Korea’s base rate hikes since the second half of last year.

The average annual interest rate for collateral loans at Korea’s five major lenders stood at between 4.69 percent and 5.29 percent in the first quarter, which is more than 2 percentage points higher than the same period in 2021 when the rate stood at between 2 percent and 2.89 percent.

Insolvency is also an issue.

The delinquency rate for personal business loans extended by local lenders stood at 0.37 percent in March, up 0.2 percentage point from last year’s 0.17 percent.

By Lim Young-sin and Chang Iou-chung

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