Consumers 'Boiling Over' Loan Interest Rates... Financial Authorities "Reviewing Calculation Methods"

[Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] As financial consumers' dissatisfaction has escalated due to the recent sharp increase in loan interest rates, financial authorities have taken action. Despite it being a period of rising interest rates, there is public opinion that commonly used credit loans and mortgage loans see rapid rate hikes, while deposit interest rates have only increased slightly. Attention is focused on whether the domestic banks' 'easy money-making' business practices, relying on the interest rate spread, can be eradicated.

On the 20th, according to financial authorities and the industry, Lee Chan-woo, Senior Deputy Governor of the Financial Supervisory Service (FSS), held a meeting with vice presidents in charge of loans from commercial banks at the Korea Federation of Banks in Jung-gu, Seoul, and ordered, "Check whether the calculation and operation of loan interest rates, especially the additional and preferential rates, are being faithfully conducted according to the model regulations."

Later, in a meeting with reporters, he explained, "It is true that loan and deposit interest rates change according to market rates, but considering the burden on the public, we intend to monitor whether there are any unreasonable aspects."

Financial Services Commission Chairman Ko Seung-beom and FSS Governor Jeong Eun-bo have previously expressed the view that it is difficult for the government and financial authorities to intervene in market interest rates. Although the principle that market interest rates should be autonomously determined has not changed in this meeting, they stated their intention to review the criteria for interest rate decisions due to significant consumer dissatisfaction.

When the base rate drops, do only loan interest rates quickly spike?

Financial consumers claim there is a problem with how domestic banks calculate interest rates. They mean that loan interest rates rise much faster than deposit interest rates. Some even complain that domestic banks have been gradually widening the interest rate spread between loans and deposits not only now but also in the past. According to the Bank of Korea, the base rate was at a historic low of 0.50% on May 28 last year and was raised by 0.25 percentage points in August. At that time, the loan-deposit interest rate spread was 2.07%, the largest in 11 years. This was because the loan interest rate increased more than three times faster than the deposit interest rate. The interest rate on newly issued household loans in September was 3.18%, up 0.37 percentage points over 15 months, while the deposit interest rate for savings was 1.17%, up only 0.10 percentage points.

Conversely, during the base rate cut phase, deposit interest rates decreased faster than loan interest rates. The base rate, which was 1.75% in November 2018, was lowered by 1.25 percentage points in four steps. During this period, loan and deposit interest rates moved from 3.63% to 2.81% and 1.96% to 1.07%, respectively. The loan interest rate dropped by 0.82 percentage points, showing less fluctuation than the base rate. This was even lower than the deposit interest rate cut level (0.89 percentage points).

The problem lies in the interest burden on financially vulnerable groups. Household debt has already increased significantly due to COVID-19 and high real estate prices, and the rise in loan interest rates inevitably reduces the benefits for financial consumers. Recently, a post titled "Please stop banks from profiteering on additional loan interest rates under the pretext of managing household loans" was posted on the Blue House petition board.

The FSS plans to request banks to submit data related to the loan interest rate calculation method as a countermeasure. Loan interest rates are calculated by adding the funding cost and additional interest rate and subtracting the preferential interest rate. They will check whether banks have excessively earned interest income from the additional and preferential rates. They also demanded the activation of the right to request interest rate reductions from financial companies when the borrower's credit improves.

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