Troubles of Korean small merchants and self-employed may worsen as they increasingly turn to the second or third-tier lenders despite heavier rates, raising concerns about their delinquency building up risk to the financial sector.

Self-employed and small business owners in April-June quarter borrowed total 120.3 trillion won ($103.5 billion) from non-bank lenders such as mutual credit companies and savings banks while their lending from primary banks totaled 336.2 trillion won, according to NICE Credit Information Service Co. on Sunday.

Borrowings from lower-tier lenders were still smaller compared to banks, accounting for 26.4 percent of the total small business loans versus 73.6 percent of the latter but the growth pace has been faster.

Small business loans from non-banking lenders in the second quarter jumped 26.3 percent from the same period last year, while those from banks expanded 12.1 percent. In a year, small business loans from the non-banking sector increased by 25.1 trillion won, with mutual credit companies lending out a fresh loan of 20.2 trillion won, credit companies 2.7 trillion won, and savings banks 1.6 trillion won.

Small business owners also flocked to lower-tier lenders to borrow their household cash due to stricter lending requirements at banks. Small business owners who have debts to repay for their corporate loans borrowed total 248.2 trillion won for household needs in the second quarter, with 50.4 percent coming from second-tier lenders.

“Bank loans still make a much greater portion of the country’s small business loans but it is important to keep an eye on the latest trend of increasing debts from secondary lenders,” said Seo Jung-ho, senior researcher at Korea Institute of Finance. “The chance for debt to go overdue or even default risk increases when the debts from secondary market grow bigger.”

By Choi Seung-jin and Cho Jeehyun

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