Low-to-mid credit borrowers' delinquency rate hits 4-year high, could become a fuse in rate hike period

South Korea's "weak link" – individuals with low-to-mid credit scores – are struggling under the weight of high interest rates and inflation. Their loan delinquency rate has climbed to its highest point in four years, sounding an alarm for their ability to repay debts.

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The weak link in the economy, the common people, find it particularly difficult to withstand the weight of high interest rates and high prices.

These borrowers, numbering around 10 million, include small business owners without sufficient income, employees of small and medium-sized enterprises, and young adults with limited financial histories. Data submitted to a lawmaker shows their delinquency rate reached 2.32% by the end of May. This figure is nearly five times the overall household loan delinquency rate of 0.45%.

The situation is particularly dire in provincial areas, where the delinquency rate for credit loans among low-to-mid credit borrowers at six regional banks hit 5.0%. This reflects a prolonged regional economic downturn, trapping more individuals in a cycle of debt.

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The delinquency rate for low-to-mid credit borrowers, those with credit scores below grade 3, stood at 2.32% as of the end of May, the highest in four years.

The rising delinquency rate is occurring precisely as interest rates increase. The Bank of Korea recently raised its benchmark rate for the first time in three and a half years. This raises concerns that "debt-fueled" investments in stocks and real estate could lead to a further surge in delinquencies.

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The delinquency rate for low-to-mid credit borrowers' credit loans at six regional banks, which operate based on regions, rose by 0.7 percentage points to 5.0% compared to a year earlier.

Experts warn that simply addressing defaults after they occur, such as through debt forgiveness, can create moral hazard and cause significant hardship for borrowers. They advocate for proactive measures, including early identification of at-risk individuals and offering them opportunities to refinance at lower interest rates to prevent long-term delinquency. A comprehensive approach combining financial support with job and income assistance is crucial for these individuals to regain their footing.

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It is important to identify crisis-stricken low-to-mid credit borrowers early, provide them with opportunities to switch to relatively lower interest rates, and help them avoid falling into long-term delinquency.