South Korea's 'zombie borrowers' keep getting new loans, even as their cities decline

South Korean non-banks are extending new loans to households that cannot pay their existing debts. These "zombie borrowers" are not defaulting, but their consumption is falling, and their cities are seeing slower economic growth.

Banks usually cut off credit to people who cannot pay their debts. This paper shows that in South Korea, non-bank lenders are doing the opposite for a specific group of borrowers. This keeps the borrowers from defaulting, but it also means they are stuck in a cycle of debt and declining spending. This could hide deeper economic problems.