Small Business Loans Face Growing Challenges

South Korea’s self-employed sector is facing increasing financial strain,as evidenced by a meaningful rise in private business loan delinquency rates. Recent data reveals a concerning trend, with smaller financial institutions bearing a disproportionate burden.

The Surge in Delinquencies: A Closer Look

The first quarter of 2025 witnessed a considerable increase in delinquent private business loans, reaching ₩13.2 trillion. This represents a 16.7% jump from the end of the previous year (₩11 trillion) and a staggering 41.9% surge compared to the same period last year (₩9.3 trillion). This sharp increase raises alarms about the financial health of small businesses across the nation.

Non-Bank Lenders: A Higher Risk Profile

An analysis of loan portfolios reveals a stark contrast between banks and non-banking financial institutions. While banks have largely maintained their loan volumes, non-banks have experienced a notable increase. More concerningly,the proportion of delinquent loans is considerably higher among non-bank lenders,especially savings banks and mutual finance associations.

specifically, savings banks reported a delinquency rate of 5.6%, followed by mutual financing at 3.2%. In contrast, credit specialists showed a rate of 1.1%, and insurance companies had the lowest at 0.3%. This disparity suggests that businesses relying on smaller financial institutions might potentially be facing greater difficulties in repaying their debts.

The data clearly indicates a higher risk associated with loans from savings banks and mutual finance institutions.

Korea Credit Data Small Business Trend Report

Breakdown of Loan Distribution

According to the ‘Korea Credit Data Small Business Trend Report,’ the total balance of domestic loans in the first quarter reached ₩719 trillion. Banks accounted for ₩433 trillion (60.3%), while non-banking institutions held ₩285.9 trillion. Within the non-banking sector, mutual loans (agricultural, forestry, fisheries, credit unions, and saemaul Undong) comprised the largest share at 31.4% (₩225 trillion). Credit cards and capitalized creditors followed with 3.0% (₩21.4 trillion), and savings banks held 2.3% (₩16.4 trillion).Insurance accounted for a smaller portion at 0.3% (₩2.2 trillion).

Business Closures: A Troubling Indicator

The number of businesses with outstanding loans totaled 3,619,000, with 499,000 (13.8%) having closed their doors. The closure rate was significantly higher for businesses that had borrowed from non-banking institutions (16.6%) compared to those with bank loans (9.4%). Savings banks recorded the highest closure rate at 9.9%, followed by credit specialists (9.3%), mutual finance (5.7%), and insurance (4.8%).

economic context and Potential Implications

These figures arrive amidst concerns about a potential economic slowdown and rising interest rates. The combination of these factors could further exacerbate the financial difficulties faced by small business owners, potentially leading to more closures and increased loan defaults. Experts suggest that targeted support measures may be necessary to mitigate the impact on vulnerable businesses.

For example,government-backed loan guarantee programs could help small businesses access financing at more favorable terms. Additionally, financial literacy programs could empower entrepreneurs to make informed decisions about borrowing and managing their finances.

Methodology

The analysis is based on private business loan data obtained from the Korea Credit information Service as of March 31, 2025. Private business loans are defined as corporate loans extended to individual business owners with a business registration certificate, excluding policy funds and lease loans.