[Financial Stability Report] "Interest Burden for Vulnerable Self-Employed Borrowers to Rise if Financial Conditions Tighten...Selective Support Needed"

Amid growing expectations of a base interest rate hike next month, concerns have been raised that if financial conditions shift toward further tightening, interest burdens could increase—especially for self-employed individuals and vulnerable borrowers—thereby expanding the risk of insolvency.

The outcry from self-employed business owners is severe. Many shops are closing down, saying, "It's harder than during the COVID-19 pandemic," but no one is starting new businesses, so there is no virtuous cycle. Even after thorough cleaning, tightening, and straightening up, Hwanghak-dong Kitchen Street remains deserted because no one is coming to start a business there. Photo by Jo Yongjun

On June 24, the Bank of Korea released its Financial Stability Report for the first half of 2026, reviewing risks stemming from structural changes in the self-employed sector and sharing these findings.

The Bank of Korea analyzed the structural changes in self-employment over the past decade across market, industry, age, and financial dimensions. The results showed that, over the past 10 years, both the number of self-employed individuals and their loans have become concentrated in the real estate sector, while the proportion of older self-employed persons and their financial liabilities have also increased. In addition, the bank noted that the repayment capacity of self-employed individuals has weakened from a financial structure perspective, and the share of vulnerable borrowers has risen.

In particular, the number and proportion of vulnerable borrowers—those with relatively low repayment capacity—have increased since 2022. The Bank of Korea explained that, while low lending rates persisted during the COVID-19 pandemic, the rise in interest rates from 2023 led to higher principal and interest payments, which in turn caused the debt service ratio (DSR) to climb rapidly once again.

The Bank of Korea pointed out that this structure amplifies financial stability risks through various channels, including increased asset quality pressures in the non-bank sector.

The core concern is that, should financial conditions become more restrictive going forward, or if the service sector economy weakens, the delinquency rate on loans to self-employed individuals could rise, resulting in the materialization of potential insolvencies. The Bank of Korea estimated the factors influencing the delinquency rate among self-employed borrowers and found that both rising interest rates and a slowdown in the service sector led to higher delinquency rates with a time lag, with the impact being more pronounced among vulnerable borrowers. In particular, an increase in small and medium-sized enterprise lending rates had a greater effect on vulnerable borrowers (0.8398) than on the overall self-employed population (0.1632).

The Bank of Korea warned that if domestic financial conditions become tighter than anticipated, and if the service sector economy deteriorates as projected under a pessimistic scenario, the loan delinquency rate for self-employed individuals could surge sharply from 2.04% in the first quarter of this year to as high as 2.58% going forward.

The Bank of Korea stated, "Policy responses for the self-employed should prioritize managing insolvencies in vulnerable sectors while simultaneously seeking to mitigate structural weaknesses. Rather than a broad-based support system for all self-employed individuals, it is necessary to refine the framework into a selective support system that takes into account both borrowers' repayment capacity and the sustainability of their businesses."

The bank further emphasized, "In particular, for older self-employed individuals who are affected by demographic changes and tend to have weaker income bases and higher debt burdens, comprehensive support measures are desirable—not only financial assistance but also enhancements to the social safety net and supplementary retirement income."

This content was produced with the assistance of AI translation services.