Increased Loan-to-Deposit Interest Rate Spread Amid Stricter Lending Regulations

Last Year's Household Loan Interest Rate Increase
Savings Deposit Rates Remain Unchanged
Concerns Over Impact on Real Demand Borrowers and Low-Income Groups

[Asia Economy Reporter Kangwook Cho] Last year, while loan interest rates rose sharply, the interest rates on savings and deposits increased by a smaller margin, resulting in a significant widening of the banks' loan-to-deposit interest rate spread. This reverse trend is interpreted as a consequence of the continued ultra-low interest rate environment and the financial authorities' comprehensive tightening of loans. Some express concerns that the loan cliff for low-income and financially vulnerable groups will deepen.

According to the Bank of Korea on the 4th, the loan-to-deposit interest rate spread based on new transaction amounts for banks was 1.81 percentage points in November last year, expanding by 0.03 percentage points from the previous month. Compared to 1.62 percentage points in December of the previous year, it increased by 0.19 percentage points. The balance-based loan-to-deposit interest rate spread, which is related to banks' profitability, also widened by 0.01 percentage points to 2.02 percentage points. This is because, despite the ultra-low interest rates, household loan interest rates at banks rose while deposit and savings interest rates remained stagnant.

From 2019 until early last year, the Bank of Korea's base rate cuts led to a decline in market interest rates, causing both loan and deposit interest rates to fall. However, towards the end of the year, as banks raised household loan interest rates to manage total credit volume, the loan-to-deposit interest rate spread began to widen.

In fact, in November last year, the household loan interest rate at banks was 2.72% per annum, up 0.08 percentage points from the previous month. This marked the third consecutive month of increase since September of the same year. The increase was the largest in one year and two months since September 2019 (0.1 percentage points). The mortgage loan interest rate rose by 0.09 percentage points to 2.56%, the highest in seven months since April last year (2.58%). Interest rates on group loans (0.11 percentage points) and guaranteed loans (0.15 percentage points) also rose consecutively. Additionally, the interest rate on small and medium enterprise loans increased by 0.05 percentage points to 2.86%, marking an upward trend after two months since September last year.

Although the ruling party has pointed out that the loan-to-deposit interest rate spread is too large, banks claim they are unfairly criticized. In the past, banks were criticized for "interest profiteering" by sharply raising loan interest rates during rate hikes while only slightly increasing deposit rates. However, the current loan-to-deposit interest rate spread is said to be a problem caused by the authorities' household loan regulations.

Some raise concerns about side effects such as reduced financial accessibility for real estate end-users, low-income, and financially vulnerable groups due to the widening loan-to-deposit interest rate spread. Although banks have resumed unsecured loans in the new year, it is unlikely that the raised loan thresholds due to strengthened total volume regulations by financial authorities will be lowered again. Self-employed individuals and low-income earners, facing difficulties in financing, are turning to second-tier financial institutions and illegal private loans despite high interest rates. According to the Financial Supervisory Service, household loans from second-tier financial institutions such as credit card companies, capital companies, savings banks, and insurance increased by 4.7 trillion won in November last year compared to the previous month, marking the largest increase ever recorded.

Senior Research Fellow Sungwook Park of the Korea Institute of Finance pointed out, "As the economic shock from the novel coronavirus disease (COVID-19) prolongs, economic polarization is expected to deepen for the time being, and the risk of loan defaults among vulnerable groups may increase."

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