Corona Financial Support, Big Base Rate Cut Impact Leads to Sharp Drop in Commercial Bank Loan Rates

Loan Interest Rates Begin to Drop Significantly for Sole Proprietors and SMEs

[Asia Economy Reporter Kim Hyo-jin] The loan interest rates of major commercial banks are sharply declining. This is interpreted as a result of the government's large-scale financial support in response to the novel coronavirus infection (COVID-19), the relaxation of soundness regulations, and the Bank of Korea's base rate "big cut" (significant interest rate reduction) measures working together. Commercial banks have stated that based on this trend, they intend to lower the loan threshold as much as possible for vulnerable groups in the future.

According to the interest rate and fee comparison disclosure data from the Korea Federation of Banks on the 22nd, the average interest rate for all grades of individual business owner credit loans from the five major commercial banks?Shinhan, KB Kookmin, Hana, Woori, and NH Nonghyup?was recorded at 4.07% this month. Individual business owner loans are mainly used by self-employed, small business owners, and small-scale corporations. The rate slightly increased from 4.33% in January to 4.35% in February but has noticeably decreased since March (4.27%).

The monthly interest rate figures compiled by the Korea Federation of Banks are based on loans handled during the three months prior to the respective month. This aligns with the trend of financial and monetary authorities' measures in response to the spread of COVID-19, including the base rate cut to 0.75% and the activation of extensive financial support policies covering both public and private sectors.

It is also analyzed that the temporary relaxation of soundness and liquidity regulations, such as banks' Liquidity Coverage Ratio (LCR) and Loan-to-Deposit Ratio (LDR), has increased the banking sector's funding supply capacity by nearly 260 trillion won, which has had an impact.

The average interest rate for small and medium-sized enterprise (SME) credit loans from these commercial banks also slightly rose from 4.56% in January to 4.59% in February, then decreased to 4.51% in March and further to 4.07% this month. The average interest rate for general household credit loans was reduced from 3.41% in January to 3.37% in February, 3.24% in March, and 3.03% in April.

A representative from a commercial bank explained, "For the time being, all credit will likely have the nature of COVID-19 support," adding, "Demand for general loans that are not specifically named as COVID-19 support products is expected to continue increasing, and conditions are being created to ensure sufficient supply as much as possible."

According to the Bank of Korea's financial institution loan behavior survey results announced the day before, heads of credit operations at commercial banks responded that they would further ease loan attitudes when handling SME and general household loans in the second quarter. This means lowering various screening conditions related to loans or increasing loan limits.

The loan attitude index (forecast) for SME loans, quantified from the survey results, was 20 in the second quarter, maintaining a positive (+) trend for six consecutive quarters since the first quarter of last year (17). An index above 0 indicates easing attitudes, while below 0 indicates tightening attitudes. The loan attitude index for general household loans was also 13, indicating an easing attitude.

However, credit officers expect a significant increase in credit risk caution for SMEs and others due to worsening business conditions caused by the sluggish real economy.

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