Self-Employed Delinquencies Hit 13-Year High... High Interest Rates and Oil Prices Fuel Fears of Domino Defaults

0.86% in August, the highest since May 2013
Overall banking-sector delinquency rate hits 0.69%, highest since 2016
High oil prices and rising global market rates increase repayment burdens
Concerns grow over rising delinquencies and defaults amon

As rising interest rates increase the burden of loan repayments, the delinquency rate on bank loans to sole proprietors has climbed to its highest level in 13 years. With the benefits of an economic recovery led by the semiconductor sector failing to spread across domestic demand, sole proprietors' ability to repay their loans is rapidly deteriorating. Concerns are mounting that delinquencies and loan defaults will spread, particularly among vulnerable borrowers, as high oil prices caused by the war in the Middle East coincide with rising global market interest rates.

According to the Financial Supervisory Service (FSS) on October 23, the delinquency rate on loans to sole proprietors at domestic banks stood at 0.86% at the end of August 2026, based on principal or interest payments overdue by at least one month. This was up 0.09 percentage points from the previous month and 0.08 percentage points from the same month a year earlier. It was the highest level in 13 years and 3 months, since 0.92% at the end of May 2013.

The delinquency rate on loans to small and medium-sized corporations also rose to 1.1%, up 0.1 percentage points from the previous month and 0.13 percentage points from the same month a year earlier. As a result, the delinquency rate on loans to small and medium-sized enterprises, including sole proprietors and small and medium-sized corporations, returned to the 1% range after three months, reaching 1.0%. This was an increase of 0.09 percentage points from the previous month and 0.11 percentage points from the same month a year earlier.

Delinquencies increased among sole proprietors and small and medium-sized enterprises, pushing up the overall delinquency rate across the banking sector as well. At the end of August, the delinquency rate on won-denominated loans at domestic banks was 0.69%, up 0.06 percentage points from the previous month and 0.08 percentage points from the same month a year earlier. This was the highest level in 9 years and 10 months, since 0.81% in October 2016.

By segment, the delinquency rate on corporate loans rose to 0.86%, up 0.08 percentage points from the previous month and 0.13 percentage points from the same month a year earlier. Within this category, the delinquency rate on loans to large corporations also rose to 0.39%, up 0.03 percentage points from the previous month and 0.24 percentage points from the same month a year earlier. This was its highest level in 5 years and 4 months, since it also stood at 0.39% in April 2021.

Delinquency rates on household loans are rising, led by credit loans. By category, the delinquency rate on mortgage loans rose 0.02 percentage points from the previous month to 0.31%, while the rate on non-mortgage loans, including credit loans, rose 0.07 percentage points to 0.91%. The overall delinquency rate on household loans increased 0.03 percentage points from the previous month to 0.45%, but was unchanged from the same month a year earlier.

The overall delinquency rate across the banking sector has been on a general upward trend since hitting a low of 0.2% in June 2022. Measures introduced by financial authorities during the spread of COVID-19 in 2020 to extend loan maturities and defer principal and interest payments temporarily curbed the rise in delinquencies. However, analysts say potential loan defaults are gradually becoming a reality as the burden of higher interest rates, driven by global monetary tightening, has accumulated since then.

In particular, the gap between the recovery in exports and domestic demand is increasing the risk of defaults among sole proprietors. Although South Korea's economic growth rate is expected to rise from 1.1% in 2025 to 3.5% in 2026, thanks to strong performance in some export industries, including semiconductors, the export-led recovery has not spread across domestic demand. With sales recovering slowly, the burden of costs caused by high interest rates, high inflation, and high oil prices is also worsening sole proprietors' profitability and ability to repay debt.

Delinquency rates are indeed rising noticeably in industries where sole proprietors are heavily concentrated. At Industrial Bank of Korea (IBK), which has a high proportion of loans to sole proprietors and small and medium-sized enterprises, the delinquency rate on loans to the accommodation and food service industry jumped from 0.53% at the end of 2022 to 1.4% at the end of 2025. It eased somewhat to 1.24% at the end of June 2026, but remained more than double the rate at the end of 2022. The situation in the wholesale and retail industry is even more serious. Its delinquency rate rose from 0.36% at the end of 2022 to 1.02% at the end of 2025, then climbed further to 1.11% at the end of June 2026. This illustrates how the prolonged slump in domestic demand is steadily weakening sole proprietors' ability to repay their debts.

The problem is that the high-interest-rate environment is likely to persist. Since the United States began raising interest rates in March 2022, its benchmark rate has risen from an annual 0%-0.25% to its current level of 3.75%-4.0%. Expectations are growing that high interest rates will persist for an extended period amid inflationary pressures from tariff policies and the war in the Middle East. Markets expect the U.S. benchmark rate to rise by an additional 0.25 percentage points in December, reaching 4.0%-4.25%.

Expectations of U.S. rate hikes and inflation concerns are also putting upward pressure on market interest rates. The yield on the 10-year U.S. Treasury, a global benchmark for bond yields, is currently around 4.9%. Although it has fallen from levels well above 5% recently, it remains considerably higher than the roughly 4.1% level at the start of the year. This is why concerns about rising lending rates have not subsided, even though the Bank of Korea held its benchmark rate at an annual 3.0% the previous day, October 22.

If this rise in market interest rates is reflected in domestic banks' lending rates, the interest burden on small-scale sole proprietors, who have so far endured sluggish sales and rising costs, is expected to grow further. The risk is particularly high that delinquencies, loan defaults, and business closures will spread in a chain reaction among marginal borrowers with limited repayment capacity.

Financial authorities are also wary of the possibility that loan defaults will increase, particularly among vulnerable borrowers. The FSS believes the upward trend in delinquency rates could continue, given uncertainty in domestic and international economic conditions and the upward trend in market interest rates, and plans to encourage banks to strengthen their soundness management.

An FSS official said, "Delinquency rates continue to rise, particularly on loans to small and medium-sized corporations, sole proprietors, and households' credit loans." The official added, "We will continue to encourage the banking sector to proactively build up its loss-absorbing capacity and strengthen soundness management through active write-offs and sales of nonperforming loans."

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