Loan Interest Rates Surge Sparks Complaints... Experts Say Banks Are Charging Excessive Interest Profiteering

"Regulating Total Loan Volume Inevitably Distorts Price Mechanism"

[Image source=Yonhap News]

[Asia Economy Reporters Sunmi Park and Hyojin Kim] Public dissatisfaction among low-income households is surging as loan interest rates rise faster than market interest rates. The government and financial authorities have ordered banks to manage the total volume of household debt and have expressed a stance of non-intervention due to concerns over backlash against regulatory finance. However, as criticism grows over the inversion of loan interest rates between secondary financial institutions and banks, as well as excessive interest profit-taking, experts are increasingly calling for appropriate government measures.

On the 16th, economic and financial experts emphasized the need for action regarding the recent rapid surge in loan interest rates at commercial banks. They pointed out that this phenomenon is caused by the government's excessive total volume regulation, and since the government bears responsibility, more proactive measures should follow.

Professor Jungkeun Oh of Konkuk University’s Department of Economics diagnosed, "Regulating total loan volume inevitably distorts price functions. Since the 2008 global financial crisis, most advanced financial countries have managed loans through soundness regulations, but in our case, the fundamental problem is that we have moved toward regulating total volume." Professor Se-don Shin, Emeritus Professor of Economics at Sookmyung Women’s University, also noted, "Banks are raising interest rates to generate profits as their lending operations are restricted by loan regulations," adding, "The government is also responsible for the rapid rise in loan interest rates."

Professor Daejong Kim of Sejong University’s Department of Business Administration criticized, "The base interest rate has only risen by 0.25 percentage points, but banks are raising loan interest rates to around 5-6% by increasing the spread, which is clearly problematic." He advised, "The government needs to thoroughly monitor banks and actively manage so that interest rates rise only in line with the base rate hike."

On the other hand, there are criticisms that government intervention in bank interest rates could cause side effects. Professor Taeyoon Sung of Yonsei University’s Department of Economics said, "Loan total volume regulation has given banks greater monopoly power through expanded interest margins. However, direct government intervention in interest rates could distort the market, so strengthening competition is an alternative."

Loan interest rates at banks are rapidly rising amid base rate hikes and a loan regulation atmosphere. Fixed-rate mortgage loan interest rates have already surpassed 5%, and variable-rate mortgage loans at the five major commercial banks are on the verge of entering the 5% range. Variable rates have risen by 1 percentage point in five months, more than three times the rise in the COFIX rate. The COFIX rate for new contracts in October, announced on the 15th, rose by 0.13 percentage points in one month to 1.29%, marking the highest level in 1 year and 8 months. Banks that calculate variable mortgage loan interest rates linked to COFIX applied the increased rates starting that day.

In the market, banks are being criticized for exploiting the household loan regulation atmosphere to maximize interest profits. A petition titled "Please stop banks from profiteering on additional loan interest rates under the pretext of managing household loans," posted on the Blue House’s public petition board on the 5th, received over 14,000 endorsements.

While banks give only a "small amount" of interest on deposits, they raise loan interest rates significantly, causing the interest rate spread between deposits and loans in the banking sector to widen. According to the Bank of Korea, the interest rate spread (based on balance) in the banking sector expanded from 2.05% at the end of December last year to 2.14% at the end of September this year. Following the Bank of Korea’s Monetary Policy Committee’s 0.25 percentage point base rate hike in August and the expected further increase on the 25th, the upward momentum in bank loan interest rates will accelerate, likely widening the interest rate spread further.

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