Banks criticized for ‘greedy’ increase in interest rates on loans
Lee Min Hyun
Commercial banks have been criticized for hurriedly raising interest rates on loans after the Bank of Korea (BOK) base rate hike last month, while not rushing to raise interest rates on deposits.
As the central bank continually sends signals to phase out ultra-low interest rates, customers are expected to pay more interest on their loans. As a result, some describe commercial banks as downright greedy.
As of the end of July, deposit rates of Korean banks were still below 1 percent. The average interest rate on deposits amounted to 0.97 percent, which is 0.03 percentage points higher than a month ago. In contrast, interest on household loans rose 0.07 percentage points to 2.99 percent over the same period, according to the BOK.
The data also showed that the interest rate on deposits rose by only 0.07 percentage points at the end of July compared to the end of 2020. But the household loan rate jumped 0.2 percentage points over the same period.
Households are expected to be more exposed to interest rate risk in the second half of this year, when the central bank reported a high likelihood of another key rate hike. BOK raised its key rate by 25 basis points in August for the first time since the COVID-19 pandemic that erupted early last year.
Korean banks have long been criticized for relying too much on interest on loans to make a profit, without trying to find new engines of growth.
Industry officials said it is realistically difficult for banks to reduce their dependence on traditional revenue streams in a short period of time as they need to survive in an increasingly competitive environment not only from their regular competitors, but also from emerging fintech players.
“Financial groups continue to pledge to increase their profitability in the non-banking sector, but it takes time before they can find a concrete and sustainable source of profit other than loans,” said a source in the financial industry.
This is in part because banks continue to measure and benchmark their earnings on a quarterly basis with those of their competitors, and no lender wants to be left behind by making risky investments in unused areas, the source said.
Their persistent propensity to borrow will remain a heavy burden on households for the foreseeable future, as the BOK shows signs that it will push for further rate hikes in October or November to control rising household debt levels following the pandemic.
The central bank is expected to continue raising its key rate to more than 1 percent next year, in line with a scenario where economic fears over a fourth wave of the pandemic subside and domestic consumption returns to a stable recovery trajectory.