BNK Financial's Launch of 'Overdue Interest Reduction' Signal... Will It Spread Across the Financial Sector? (Comprehensive)

BNK Financial Group, Industry First "Waive Late Interest if Normal Interest Paid Within 3 Months"
Concerns Over Financial Authorities' Backlash Against Bold Voluntary Policy by Commercial Banks
Gyeongnam Bank: "Credit Rating Drops Despite Late Interest Waiver, No Issue with Implementation"

[Asia Economy Reporter Song Seung-seop] City banks are experiencing unexpected distress over BNK Financial Group’s introduction of the ‘Overdue Interest Reduction System,’ the first of its kind in the financial sector. As the grace period for principal and interest repayment on COVID-19 loans is extended once again, there is concern that the bold support from regional banks could trigger additional backlash from financial authorities and political circles. City banks, already dissatisfied with proposed bills on loan principal and interest reductions, are on high alert, fearing pressure to voluntarily implement similar systems.

First Overdue Interest Reduction in Financial Sector... Expected Scale at Least Around 2 Billion KRW

Notice of the 'COVID-19 Affected Companies Overdue Interest Reduction Program' posted on the Busan Bank website
Photo by Busan Bank

On the 26th, according to financial sources, BNK Financial announced that through its affiliates Busan Bank and Kyongnam Bank, it will implement an overdue interest reduction system targeting local small business owners who took out COVID-19 loans. If overdue interest occurs, paying the normal interest within three months will result in a reduction of the overdue interest. The deadline is set until the end of this year, excluding individuals undergoing rehabilitation procedures.

The scale of the overdue interest reduction is estimated to be at least in the 2 billion KRW range. A Kyongnam Bank official explained, "About 1 billion KRW will be reduced," adding, "This is not a precise figure but a result calculated considering the current loan situation, overdue rate, and overdue interest rates." Busan Bank did not disclose specific figures, citing difficulty in calculating overdue interest precisely, but considering it is larger than Kyongnam Bank’s amount, it is estimated to be over 1 billion KRW.

The overdue interest reduction system is an unprecedented measure in the financial industry. Financial companies have so far provided various financial supports to vulnerable groups considering the COVID-19 situation. However, even in those cases, support was mostly limited to maturity extensions and preferential interest rates for new or refinancing loans. There has been no support measure in the form of forgiving loan interest generated by private financial companies.

Some speculate that the bold move by regional banks might elevate the interest reduction system as a financial support measure pressured by the government and political circles. Currently, major banks have been implementing loan maturity extensions and interest repayment deferrals for over a year under the direction of financial authorities. Political circles are intensifying pressure to limit interest or share profits as financial companies’ earnings rapidly increase. Financial companies, which must consider the government and ruling party’s stance, are expected to have no choice but to introduce the interest reduction system if prompted.

Will the Interest Reduction System Spread Across the Financial Sector? "Difficulties Due to Profit Decline and Moral Hazard"

[Image source=Getty Images Bank]

The financial sector holds the view that supporting overdue interest through reductions is difficult. Since a significant portion of profits must be devoted to strengthening soundness, not receiving interest, which is a source of revenue, could lead to deterioration in operating profit.

Regarding this, a Kyongnam Bank official stated, “Overdue interest is not the interest agreed upon with the customer but an additional charge imposed when the agreement is not met,” adding, “Since overdue interest is not considered when setting profit targets, it is not an issue linked to operating profit.” While overall profits may decrease due to the interest reduction, if the impact were severe enough to cause concern, the system would not have been implemented in the first place.

Concerns about fairness issues have also been raised. The difference between customers who pay interest on time and those who do not would disappear. A bank official explained, "There are customers who pay normal interest diligently despite difficult circumstances," adding, "While it may be ‘good finance,’ if overdue interest is not collected, fairness is compromised, inevitably causing dissatisfaction."

Some point out that moral hazard could arise, leading to higher-than-expected expenditures. Another bank official said, “Interest forgiveness is sometimes given to bad borrowers undergoing debt adjustment or personal rehabilitation procedures to recover at least the principal,” but added, “Institutionalizing and officially implementing this is a completely different matter.” Once the system is publicized, people who have the capacity to pay interest might deliberately avoid paying overdue interest.

The official added, “Overdue interest on loans is fundamentally a penalty agreed upon between the bank and the customer to encourage faithful repayment,” and said, “Although the intention is good, if many people abuse it, it could harm financial companies, making implementation difficult.”

Kyongnam Bank maintains that there is no problem with implementation. A bank official claimed, “Credit scores still decline even when overdue interest is reduced,” and argued, “The claim that fairness is compromised is not true.” They also rebutted, “Moral hazard, such as deliberately causing overdue to avoid paying small amounts, will not occur.”

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