Vulnerable Self-Employed

Definition and origin

The Bank of Korea defines vulnerable borrowers as multi-debtors who are low-income (bottom 30%) or low-credit (credit score of 664 or below); for the self-employed the multi-debt threshold is three or more loan products, unlike households (three or more lending institutions). A Korean economic dictionary states the same standard as credit grades 7 to 10 and, citing the Bank's 28 March 2019 Financial Stability report, records vulnerable-borrower debt of 86.8 trillion won at end-2018. The series has been compiled in the household-debt database since 2012 and continues through the Q1 2026 data in the H1 2026 report.

History

The vulnerable-borrower category predates the self-employed debate. After estimating marginal households in 2015-2016, the Bank of Korea stopped in 2017 because that measure rested on household financial assets and liabilities and did not capture repayment capacity including real assets, and instead produced borrower-based vulnerable borrowers and household-based high-risk households. Vulnerable-borrower loans were 9.4% of all household loans in 2012, and their debt reached 86.8 trillion won at end-2018, up 4.1 trillion won in a year. The loan share fell to 5.9% in Q2 2020.

The self-employed segment came to the fore during COVID-19. Self-employed loans first exceeded 1,000 trillion won in Q3 2022 at 1,014.2 trillion won (up 14.3% year-on-year), and borrowers rose 61.7% from 1.914 million at end-2019 to 3.096 million in Q3 2022. The Bank projected that if financial support ended, the bad-debt risk rate for vulnerable borrowers would reach 19.1% at end-2023, with 39.2 trillion won at risk. The vulnerable share among the self-employed rose from 10.1% in Q1 2022 to a record 13% in Q1 2025, then fell to 12.6% (404,000 borrowers) at end-2025, while their share of loans widened from 8.3% to 10.5% over the same period. At end-2025 self-employed borrowers fell by 30,000 to 3.211 million while loans rose by 9.1 trillion won to 1,092.9 trillion won. The Bank attributes the deterioration to high loan rates and falling income from the sluggish service sector: delinquency stayed low during the 2021-2022 rate rise thanks to repayment deferrals and the post-pandemic service recovery, but it turned upward after mid-2023 even as loan rates fell, as service-sector weakness persisted. In Q1 2026 loan growth slowed but distress deepened around vulnerable borrowers.

Distinctions

Potentially vulnerable borrowers are those not yet vulnerable but likely to become so, including borrowers with three or more loans at middle income and credit, or two loans at low income and credit. The vulnerable share rose from 6.4% in Q3 2025 to 6.7% in Q4, and the potentially vulnerable share from 17.8% to 18.0%. The household-based high-risk household, which replaced marginal households, is one whose total debt exceeds the assessed value of its assets and whose principal and interest repayment exceeds 40% of disposable income; 3.2% of self-employed households fell into this group in Q1 2025. In Q1 2024 self-employed households held 29 million won more in financial liabilities than assets, while non-self-employed households held 20 million won more in assets than liabilities; in 2023 current income and consumption spending were similar, but annual principal and interest repayment was 26 million won, about 40% higher, and the debt service ratio was 34.9% against 27.4%. Older self-employed borrowers were concentrated in real estate (22.9% of borrowers, 38.1% of loan value) and younger ones in retail, wholesale, lodging and food.

Relations

Vulnerable self-employed borrowers rely heavily on non-bank lenders: their non-bank loan share was 53.9% in Q2 2025, above the 38.0% of non-vulnerable self-employed borrowers and up from 45.1% at end-2021, with delinquency above 11%. Elderly borrowers are overrepresented: in Q2 2025 those aged 70 and over held 28.7% of vulnerable self-employed loans, more than triple the 8.7% held by borrowers in their 20s and 30s, unlike household vulnerable borrowers (9.8% and 22.2%). At end-Q3 2025 self-employed borrowers aged 60 and over numbered 963,000 (31.2%) holding 389.6 trillion won (36.3%), up 372,000 borrowers and 124.3 trillion won from end-2021, and 15.2% of their loans went to vulnerable self-employed borrowers, higher than other age groups. Real-estate individual businesses grew from 1.521 million at end-2015 to 2.524 million at end-2024, with domestic bank loans more than doubling from 70.3 trillion won in Q1 2015 to 163.5 trillion won in Q1 2026. Real-estate self-employed borrowers held an average 474 million won in business loans and 142 million won in household loans, 2.2 and 1.7 times other sectors, and 18.7% of rental borrowers had a rent-to-interest ratio below the 1.5 regulatory threshold, holding 59.0% of real-estate rental loans. In Q1 2026 individual businesses with annual revenue under 50 million won made up 52.2% of all individual businesses and had a 16.1% closure rate, more than double that of larger businesses, with face-to-face services such as retail, wholesale, lodging and food carrying relatively higher insolvency risk. The Bank recommends selective support by repayment capacity and business viability rather than uniform support, linking debt adjustment and closure, retraining or re-employment support for low-viability businesses.

Examples

At end-2024 vulnerable self-employed borrowers numbered 427,000, up 31,000 from 396,000 a year earlier, or 13.7% of the self-employed; their loans rose by 9.6 trillion won from 115.7 trillion won at end-2023 to 125.4 trillion won (11.8%), with delinquency of 3.43% at non-banks, 11.16% for vulnerable borrowers and 1.67% overall. In Q1 2025 their delinquency rate was 12.24%, the highest since 13.54% in Q2 2013, the overall self-employed rate of 1.88% exceeded the long-term average (Q1 2012 to Q1 2025), and the loan balance was 1,067.6 trillion won (641.9 trillion at banks, 425.7 trillion at non-banks). In Q2 2025 vulnerable self-employed borrowers numbered 437,000 (14.2% of borrowers, 12.2% of loans) holding 130.2 trillion won; their delinquency rate of 11.34% far exceeded the 1.78% overall, and the delinquency entry rate rose from about 2.5% in 2021 to 4.42% while the continuation rate rose from 71.0% to 79.4%. In Q3 2025 the self-employed loan balance was 1,072.2 trillion won (725.6 trillion in individual business loans, 346.5 trillion in household loans) with delinquency of 1.76% overall (0.53% at banks, 3.61% at non-banks, 11.09% for vulnerable borrowers, 0.50% for non-vulnerable ones). At end-September 2025 the vulnerable self-employed delinquency rate was 11.55%, the highest since 13.9% at end-September 2012, and low-income self-employed borrowers rose from 479,000 to 494,000 while low-credit borrowers rose from 199,000 to 232,000. At end-2025 vulnerable self-employed borrowers fell by 10,000 to 404,000, but their loans rose by 1.1 trillion won from 113.5 trillion to 114.6 trillion won, increasing the burden per borrower; borrowers in arrears on principal and interest numbered 148,000 (4.6%) holding 33.5 trillion won, and delinquency was 1.86% overall (3.64% at non-banks, 12.14% for vulnerable borrowers), above the 1.58% long-term average. In Q1 2026 self-employed borrowers with individual business loans numbered 3.201 million and their loans reached 1,095.5 trillion won, 28.5% of all household and corporate loans across the financial sector; overall delinquency was 2.04%, while vulnerable self-employed delinquency was 12.68%, over 16 times the 0.77% of non-vulnerable borrowers, up 7.75 percentage points from 4.93% at end-Q2 2022 against a 0.61 percentage-point rise for non-vulnerable borrowers. In its scenario analysis the Bank projected the self-employed delinquency rate rising to 2.20% by Q1 2027 in the base case and 2.58% in the pessimistic case. In its September 2025 report the Bank assessed tailored debt adjustment and interest-burden relief for vulnerable borrowers along with livelihood-recovery consumption coupons and an expanded New Start Fund positively.