Savings Banks' 'Triple Burden'... Losing Interest Rate Competitiveness While Facing Strict Regulations (Comprehensive)

[Asia Economy Reporter Kim Min-young] The savings bank industry is suffering from a 'triple burden.' As the Bank of Korea's base interest rate cuts gradually erode their interest rate competitiveness, credit unions, once considered non-competitors, are seeking to expand their influence by broadening their lending areas. Nevertheless, the limbs of savings banks remain tightly bound 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 stood at 1.94%. Since February (1.99%), when the average rate first fell below 2.0%, it has been on a continuous downward trend.

Savings banks' deposit interest rates are now even lower than those of credit unions and Saemaeul Geumgo. At the end of March, credit unions' 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 credit unions (2.16%) and Saemaeul Geumgo (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 base rate reduction) on March 16. As the base rate fell, pressure to lower loan interest rates increased, and if deposit rates were left unchanged, margins would shrink, forcing some adjustment of deposit rates. In contrast, credit unions 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 for loans, contributing to a drop in loan interest rates. While borrowing from banks was difficult, from the savings banks' perspective, 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 an all-time low of 14.67%, nearly 10 percentage points below the legal maximum 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 deposit and loan rates persists, loan assets will increase, but there will be no margin left."

There are concerns that if credit unions expand their lending areas, regional small and medium-sized savings banks could face extinction. The Financial Services Commission recently amended the Enforcement Decree of the Credit Union Act to allow credit unions to operate lending on a metropolitan scale. Currently, credit unions conduct lending only within city, county, or district units, but going forward, they will be able to lend across entire metropolitan areas such as Seoul, Incheon, and Gyeonggi. Large credit unions comparable to savings banks are expected to emerge.

An industry insider said, "Urban credit unions have already accumulated sufficient deposits but are desperate for lending opportunities," adding, "With the expansion of lending areas, they are expected to aggressively pursue loans to high-credit borrowers and corporate clients."

Nevertheless, due to past large-scale insolvency incidents and other 'original sins,' savings banks have always been shackled by regulations. So much so that there is a saying, "The Mutual Savings Banks Act is a product of regulations accumulated over the 40-plus 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 firms to acquire struggling regional savings banks to improve their financial structures and enable them to operate properly in their regions again.

A financial industry official said, "Due to long-standing 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.