Bank Loan-Deposit Interest Rate Spread Widens to Largest in 3 Years... Loan Rates Rise While Deposit Rates Fall

Bank of Korea 'Weighted Average Interest Rates of Financial Institutions in February 2021'

[Asia Economy Reporter Eunbyeol Kim] While loan interest rates are on the rise, deposit interest rates have fallen, causing the loan-deposit interest rate spread (based on new transactions) to widen to its largest gap in over two years. This is due to commercial banks reducing preferential interest rates to curb household loans such as unsecured loans, as well as lower deposit interest rates.

According to the "Weighted Average Interest Rates of Financial Institutions in February 2021" released by the Bank of Korea on the 30th, the difference between loan interest rates and savings deposit interest rates based on new transactions last month was 1.89 percentage points, up 4 basis points (1bp=0.01 percentage points) from the previous month. This is the largest gap in about three years since January 2018 (1.89 percentage points).

While loan interest rates are rising, deposit interest rates are falling, creating an unfavorable situation for financial consumers. The loan-deposit interest rate spread based on outstanding balances also widened by 3bp to 2.10% compared to the previous month. The outstanding balance-based loan-deposit interest rate spread is the largest since June last year (2.10%).

Last month, the savings deposit interest rate of deposit banks was 0.85%, down 2bp from the previous month (0.87%), while loan interest rates rose 2bp to 2.74%.

Looking at deposit interest rates, pure savings deposits (0.83%) fell 2bp mainly due to time deposits, and market-type financial products (0.92%) dropped 2bp mainly due to CDs, causing the average savings deposit interest rate to decline by 2bp. Corporate loan interest rates remained at the previous month's level (2.69%), and household loan interest rates fell 2bp to 2.81%, but the overall average loan interest rate rose 2bp from the previous month due to an increase in the proportion of household loans.

In particular, the interest rate on general unsecured household loans rose sharply by 15bp from 3.46% to 3.61%. Song Jae-chang, head of the Financial Statistics Team at the Bank of Korea, explained, "The CD rate, which is the benchmark rate for unsecured loans, rose by 5bp, but banks adjusted the spread more than the benchmark rate, causing unsecured loan interest rates to increase by 15bp." This is interpreted as banks giving fewer preferential rates on loans in consideration of government regulations on household loans. However, Song added, "The effect of some banks providing mid-interest rate loans to medium-credit borrowers was also reflected."

Additionally, mortgage loan interest rates rose 3bp from 2.63% to 2.66%, and group loan interest rates increased 10bp from 2.85% to 2.95%. These increases reflect banks widening spreads to control the growth rate of household loans. However, the interest rate on guaranteed loans, mainly jeonse deposit loans, fell 6bp, and with an expanded share of these loans, the overall household loan interest rate decreased slightly from 2.83% to 2.81%.

As of the end of February, the total deposit interest rate based on outstanding balances was 0.70%, down 3bp from the previous month, while the total loan interest rate remained steady at 2.80%.

For non-bank financial institutions, deposit interest rates rose across the board except for mutual savings banks (-8bp). Loan interest rates fell for mutual savings banks (-3bp) and Saemaeul Geumgo (-12bp), but rose 8bp for credit cooperatives. Although loan interest rates at mutual savings banks increased for both households (+15bp) and corporations (+1bp), the overall loan interest rate declined due to a reduced proportion of household loans.

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