SEOUL, KOREA - Amid a situation where the debt balance held by small business owners is in excess of 450 trillion won, a study said, an adverse shock would negatively affect the financial soundness of major banks as well.

 

According to the October 2013 Financial Soundness Report published by the Bank of Korea on October 31, the debt incurred by self-employed businesspeople as of the end of March this year was 450 trillion won. Of this, 285 trillion won was disbursed by commercial banks while the remaining 166 trillion won by non-banking financial institutions.

 

According to the report, the percentage of debt considered potentially dangerous with the debt service ratio surpassing 40 percent and the loan-to-value ratio (or the ratio of a loan to the appraised value of an asset to be acquired as collateral) in excess of 70 percent was 60.7 trillion won, or 13.5 percent in total. Of the potentially dangerous debt, about 22.2 percent (13.5 trillion won) was held by those aged older than 60.

 

According to the central bank's reckoning, in a shock in which the self-employed people lose their income over and above 15 percent and the aggregate value of properties owned by them does down more than 30 percent, the BIS-mandated capital adequacy ratio of commercial banks will decline more than 12 percent. The bank said this is a situation where the whole banking system unravels.