[Loan Regulation Conflict] Banking Sector's Preferential Interest Rate Dilemma... Reduced Rates Increase Interest Burden, Expanded Rates Raise Loan Growth Concerns

Banks Reducing or Abolishing Preferential Interest Rates
Cutting Rate Benefits Increases Interest Burden on Low-Income Borrowers... Expanding Them Raises Concerns Over Loan Growth

[Asia Economy Reporter Park Sun-mi] As loan interest rates surge sharply, putting the bank sector's loan interest rate calculation system under scrutiny, banks that had aligned with financial authorities' strengthened household loan management policies now find themselves in a difficult position. Since it has been confirmed that the reduction or elimination of preferential interest rates directly impacts the sharp rise in loan interest rates, pressure to address this issue is expected to intensify going forward.

According to the financial sector on the 19th, commercial banks maintain that the reduction or elimination of preferential interest rates was implemented as part of new loan management measures aligned with the financial authorities' policy direction to curb the rapidly increasing household debt. Banks feel uncomfortable with the perception that they reduced or eliminated preferential interest rates merely to increase interest profits.

An official from Bank A stated, "Banks inevitably lowered preferential interest rates on some loans to control the increase in household loans in line with the authorities' goal of managing total household loan volume," adding, "Due to inflation concerns, the sharp rise in market interest rates has amplified the perception of interest rate hikes, but it is being portrayed as if banks are raising rates to increase interest income."

In fact, banks began lowering preferential interest rates in the second half of this year when they strengthened loan management by limiting personal credit loan limits within annual income and reducing overdraft limits to around 50 million KRW.

Simply restoring the approximately 0.08 percentage point reduction in preferential interest rates by the five major commercial banks since June would lower mortgage loan interest rates from the current level of 3.42% (as of the end of October) to about 3.34%. However, banks are hesitant to make such a decision. Amid the rising loan interest rate environment, the number of 'interest rate nomads' switching banks to find lower interest rates is increasing, and reactivating preferential interest rates could lead to loan concentration at certain banks.

There is also the burden of being held accountable if they fail to meet the recommended loan growth rate set by financial authorities. An official from Bank B predicted, "Since the government and financial authorities are expected to strengthen total loan volume regulations next year as well, it will be difficult to expand the previously reduced preferential interest rate margins."

However, some changes are expected once discussions on the loan interest rate calculation system become more active. The Financial Supervisory Service convened deputy heads of credit departments from eight commercial banks this afternoon to emphasize transparency and rational operation of the loan interest rate calculation system. This move is interpreted as a delayed action in response to growing criticism that financial authorities have been passive despite the sharp increase in interest burdens on low-income households.

A financial authority official explained, "Since loan interest rates are prices autonomously determined by supply and demand conditions in the market, it is difficult for financial authorities to directly intervene in banks' loan interest rate calculations," but added, "We judged it necessary to inspect whether banks' loan interest rate calculation systems are being operated transparently and rationally according to the Bankers Association's voluntary regulation, the 'Model Code for Enhancing Rationality of Loan Interest Rate Systems.'"

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