Small Savings Banks Unable to Move... Struggling with Triple Hardships

Loss of Interest Rate Competitiveness
Emergence of Loan Competitors
Regulatory Constraints Persist

[Asia Economy Reporter Kim Min-young] The savings bank industry is suffering from a "triple burden." Amid an ultra-low interest rate environment causing a loss of interest rate competitiveness, credit unions (Shinhyup) have rapidly emerged as new competitors by expanding their lending territories. Despite this, savings banks remain tightly constrained by regulations.

According to the industry and the Bank of Korea as of the end of March, the average annual interest rate on one-year fixed deposits at savings banks was 1.94%. Since February (1.99%), when the average rate fell below 2.0% for the first time, it has continued to decline.

Savings banks' deposit interest rates are now even lower than those of Shinhyup and Saemaeul Geumgo. At the end of March, Shinhyup's one-year fixed deposit rate was 2.03%, and Saemaeul Geumgo's was 1.98%. Until December last year, savings banks' rates were 2.25%, higher than Shinhyup's (2.16%) and Saemaeul Geumgo's (2.12%).

The decline in savings banks' interest rates is largely attributed to the Bank of Korea's "big cut" (a 0.5 percentage point reduction in the base rate) on March 16. As the base rate dropped, pressure to lower loan interest rates increased, and if deposit rates remained unchanged, margins would shrink. Therefore, savings banks had no choice but to partially adjust deposit rates. In contrast, Shinhyup and Saemaeul Geumgo, which can raise funds through member contributions, were less affected by the base rate cut.

Additionally, due to the COVID-19 pandemic, companies facing cash flow shortages flocked to savings banks to borrow money, which also contributed to the decline in loan interest rates. While it is difficult to borrow from banks, from the perspective of savings banks, high-quality companies secured funds at relatively low rates of 5-6%. The average corporate loan interest rate at savings banks at the end of March was 6.62%. Household loan interest rates were also at a record low of 14.67%, nearly 10 percentage points below the legal maximum interest rate of 24.0%.

A savings bank CEO said, "We need to maintain a 2.0% interest rate to attract deposit customers, but with loan rates falling due to rate cuts, profitability is deteriorating," adding, "If the current gap between lending and deposit rates persists, loan assets will increase, but there will be no margin left."

There are also concerns that if Shinhyup expands its lending through regional integration, small and medium-sized local savings banks could face extinction. The Financial Services Commission recently decided to allow Shinhyup to expand its lending operations through amendments to the Shinhyup Act Enforcement Decree. Currently, Shinhyup operates lending only at the city, county, and district levels, but going forward, they will be able to lend across entire metropolitan areas such as Seoul, Incheon, and Gyeonggi. Large Shinhyup institutions comparable to savings banks are expected to emerge.

An industry insider said, "Urban Shinhyup already have sufficient deposits but are desperate for lending opportunities," and added, "With the expansion of lending scope, they are expected to aggressively pursue high-credit loans and corporate lending."

Nevertheless, due to past large-scale insolvency incidents and the "original sin," savings banks have always been shackled by regulations. It is said that "the Mutual Savings Banks Act is a product of regulations accumulated over more than 40 years since the birth of savings banks." Prohibitions on mergers and acquisitions (M&A) among savings banks and restrictions on business rights are cited as representative outdated regulations. There are calls for allowing large companies to acquire struggling local savings banks to improve their financial structures and enable them to operate properly in their regions again.

A financial sector official said, "Due to outdated regulations such as the M&A ban and business rights restrictions, savings banks cannot expand their business scale even if they want to," adding, "Even in the regulated financial industry, savings banks are tied up by regulations, unable to flourish and losing out in competition."

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