[Editorial] Surge in Bank Loan Delinquencies Shows Urgent Need to Restructure Self-Employed Sector

As loan delinquencies at commercial banks surge, alarm bells are ringing over asset quality. According to fact books recently released by the four major financial holding groups, as of the end of last year the volume of "precautionary" loans—those 1 to 3 months past due—at KB Kookmin Bank, Shinhan Bank, Woori Bank, and Hana Bank exceeded 7.9 trillion won. That is an increase of 11% from the previous year and 49% compared with 2021. More serious non-performing loans classified as "substandard or below" (over three months past due) also reached 4.5 trillion won at the end of last year, the highest level in four years.
The four major commercial banks posted a combined net profit of 14 trillion won last year, an all-time high. After the COVID-19 outbreak, a prolonged low interest rate environment fueled rapid loan growth, and banks reaped larger profits from the widened gap between lending and deposit rates. The problem is that not only sound loans increased; a large volume of risky loans with low repayment capacity also piled up. As a result, banks' buffers to absorb shocks from bad loans are weakening, and their asset quality indicators are deteriorating.
The sharp increase in bank loan delinquencies cannot be separated from the plight of self-employed business owners in crisis. The number of self-employed fell to 5.62 million last year, nearly 40,000 fewer than a year earlier, marking the steepest decline in five years since 2020. In particular, many young entrepreneurs with little capital or experience have rushed into low-barrier sectors such as lodging and food services, and transport and warehousing, only to end up closing their businesses. Many retirees are also turning to self-employment to make a living, but they too are being pushed to the brink where they can no longer hold on.
The vicious cycle in which Korean self-employment crowds into certain sectors and then falls into distress is nothing new. Start-ups in trendy lines of business such as castella cakes, bubble tea, and Tanghulu have surged, only to face a wave of delinquencies and closures once demand cools. One survey found that self-employed owners who shut down their businesses carried average debts of more than 100 million won, with closure-related costs alone exceeding 20 million won.
The government has long been aware of these structural problems but has failed to push through fundamental reforms because of limits on policy tools and fiscal resources. In a slowing economy, when more people turn to self-employment out of necessity, aggressively restricting market entry or forcing sector-by-sector restructuring raises serious concerns about unemployment and income loss. Banks, for their part, have been caught in a dilemma between tighter regulation and continued support.
Improving the fundamentals of the self-employed sector has become an urgent task, both for safeguarding financial soundness and for ensuring stable growth in the real economy. Distress among the self-employed leads to more delinquencies and loan-loss provisions in the financial sector, which in turn erodes banks' capacity to lend. That then feeds into funding difficulties for companies and households, creating a vicious circle. If excessive start-ups and low-profit business models persist, productivity will fall and the foundations of domestic demand will be shaken.
The government should use policy finance to cushion the blow for vulnerable borrowers, while at the same time streamlining sectors plagued by excessive competition and supporting self-employed owners in restarting or switching businesses. Banks need to strengthen repayment-capacity-based screening and debt restructuring so that risks are managed in advance. Inclusive finance will only be sustainable if the public and private sectors share risks and pursue support and restructuring of the self-employed sector in parallel.