Bank Loan Interest Rates Lowered... But Concentrated on High Credit Borrowers

5 Major Banks' Interest Rates at 3.12% Annually, Down 0.56%P in One Year... Lower than Kakao Bank
81% of Loans Under 4% Interest for Credit Grades 1-3... Urgent Need to Improve Practices

[Asia Economy Reporter Kim Min-young] The average personal credit loan interest rate at major commercial banks has fallen by 0.56 percentage points over the past year. It is lower than the loan interest rate of the internet-only bank KakaoBank. However, there are concerns that lending practices remain focused on high-credit borrowers, and improvements are needed.

According to the Bankers Association on the 14th, the average personal credit loan interest rate of the five major banks (Shinhan, KB Kookmin, KEB Hana, Woori, and NH Nonghyup) was 3.12% per annum as of December last year. This is a decrease of 0.56 percentage points from 3.68% in December 2018.

Shinhan Bank had the lowest rate at 2.97%, followed by Woori Bank at 2.99%, Nonghyup Bank at 3.12%, Kookmin Bank at 3.25%, and Hana Bank at 3.28%.

During the same period, KakaoBank’s loan interest rate dropped by 0.51 percentage points from 4.06% to 3.55%.

This rate is a weighted average of the interest rates on newly issued household loans in the previous month (November 2019) and the average credit rating of the borrowers from credit rating agencies.

Banks explained that the average interest rate declined due to the base rate cut and an increase in credit loans using mobile applications (apps). In October last year, the Bank of Korea lowered the base rate by 0.25 percentage points from 1.50% to 1.25%. Banks that strengthened their own mobile apps introduced non-face-to-face credit loans for office workers and professionals last year. By reducing branch costs and loan agent commissions, they were able to offer loans at lower interest rates in the 2-3% range.

However, polarization by credit rating was clearly evident in lending as well. The concentration of loans to high-credit borrowers is intensifying in bank credit loans. Typically, high-credit borrowers refer to those with credit ratings from 1 to 3.

The proportion of loans issued by the five major banks at interest rates below 4% reached 81.40% as of December last year. This is an increase of 16.82 percentage points from the average share of 64.58% in December 2018.

The share of loans issued at mid-interest rates between 6% and less than 10% was only 5.6% on average among the five major banks. While banks offer low interest rates to high-income workers such as professionals, public officials, and regular employees of large corporations, they have been stingy with mid-credit borrowers rated 4 to 7. This can be interpreted to mean that middle- and low-credit borrowers in need of funds may face difficulties.

The concentration on high-credit borrowers is the same at KakaoBank. The share of loans issued at below 4% interest in December last year was 82.6%, higher than that of the five major banks. This surged by 28.2 percentage points from 54.4% in December 2018.

This is contrary to the government’s original intention that the launch of internet banks would expand mid-interest loans for low-credit borrowers and reduce the concentration of loans to high-credit borrowers.

A financial industry official said, “To prevent mid-credit borrowers rejected by banks from turning to card loans or high-interest loans from savings banks, the five major banks and KakaoBank need to improve their credit evaluation systems and increase mid-interest loan offerings for mid-credit borrowers.”

This content was produced with the assistance of AI translation services.