Financial Authorities Struggling to Explain Rising Loan Interest Rates

Judged to be due to the rise in reference interest rates, not the total household debt limit restriction

Koh Seung-beom, Chairman of the Financial Services Commission

[Asia Economy Reporter Kwangho Lee] Financial authorities recently clarified that the sharp rise in loan interest rates at commercial banks is not due to the total household debt limit. They also consider criticisms about distortions in the financial market to be excessive. The authorities expect the current trend to continue for the time being.

On the 18th, the Financial Services Commission announced in a press release that the market loan interest rates, which had fallen to historically low levels during the COVID-19 pandemic, have risen significantly in the second half of this year.

According to Bank of Korea statistics, from the end of June to the end of September this year, the interest rate on unsecured loans handled by banks increased from 3.75% to 4.15%, and the mortgage loan interest rate rose from 2.74% to 3.01%, marking increases of 0.40 percentage points and 0.27 percentage points, respectively. Based on loan handling data from major commercial banks, it is estimated that the rate of increase was even greater last month.

The financial authorities judged that this rise in loan interest rates was largely influenced by the increase in benchmark interest rates that serve as the basis for various loans. They interpret that the interest rates on government bonds and bank bonds, which are loan benchmark rates, have risen sharply since the second half of the year due to global synchronized tightening and concerns over base rate hikes.

In particular, the interest rate increase in October is seen as an inevitable phenomenon occurring as the global credit expansion ends and the full-scale interest rate hike phase begins. It is expected that this trend may continue for some time depending on domestic and international policy and market developments.

However, the financial authorities explained that criticisms such as mortgage loan interest rates being higher than unsecured loan rates or the interest rate increase for high-credit borrowers surpassing that of low-credit borrowers do not accurately reflect reality.

First, regarding the criticism that mortgage loan interest rates are higher than unsecured loan rates, the upper limit of the mortgage loan interest rate used for comparison was for a long-term (35-year) mortgage loan product with a credit rating of grade 3. It is inappropriate to directly compare this with the upper limit of unsecured loan interest rates, which are mainly short-term (1-year) and for credit rating grade 1 borrowers.

Also, the claim that the interest rate increase for high-credit borrowers is greater than for low-credit borrowers is limited to internet-only banks. It is analyzed that internet banks, which have expanded business targeting high-credit borrowers at low interest rates, are normalizing their operations to align with their founding purpose of expanding loans to medium- and low-credit borrowers.

Financial Services Commission Chairman Seungbeom Ko also explained to reporters after a meeting with the specialized credit finance industry the previous day that the recent rise in loan interest rates is due to a significant increase in loan benchmark interest rates. He said, "Compared to that, the impact of additional interest rates and preferential rates is relatively small."

He added, "The reason loan benchmark interest rates rose is related to the increase in market interest rates and the Bank of Korea's base rate hikes," and diagnosed, "As monetary policies normalize worldwide, market interest rates have also risen significantly."

Chairman Ko also stated, "Compared to other countries, the growth rate of household credit ratio in our country is among the highest in the world," and expressed, "Even compared to the United States, our household credit ratio recently continues to rise at 105%, while the U.S. is at about 77% and decreasing."

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