Reasons Why Loan Interest Rates Feel More Expensive... Five Major Banks Charging Higher Additional Interest Rates

Comparison of Gasan Interest Rate Trends Over 5 Years
Major Banks Raise Rates by 0.5~1%P
Yoon Calls "Loan-Deposit Interest Rate Spread Disclosure" a Solution
Critics Say It Lacks Effectiveness and Impact

It has been identified that major commercial banks have recently increased their additional interest rates regardless of whether the base interest rate rises or falls. Criticism has been raised that banks may have used this strategy to minimize losses during periods of base rate cuts and maximize profits during periods of rate hikes. President-elect Yoon Seok-yeol proposed the expanded disclosure system for the interest rate spread between deposits and loans as a solution, but concerns have been raised about its effectiveness.

According to the Bankers Association on the 30th, over the past five years, the additional interest rates on general credit loans at the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) increased by about 1 percentage point from June 2019 to June 2021. During this period, the base interest rate fell by 1.5 percentage points, yet the additional interest rates actually rose.

Bank loan interest rates are calculated by adding the additional interest rate to the loan base rate known as the COFIX, then subtracting the adjustment interest rate. The additional interest rate includes operating costs, risk premiums, and target profit margins. Types of adjustment interest rates include discounts for subsidiary transactions such as salary transfers or adjustments made by headquarters or branches. For example, if the base rate is 1%, the additional rate is 3%, and the adjustment rate is 0.5%, the final interest rate becomes 3.5%.

From the end of 2016 to the end of 2018, the additional interest rate in the banking sector only increased slightly from 2.26% to 2.32%. During this period, the base rate announced by the Bank of Korea rose by 0.5 percentage points from 1.25% to 1.75%, but the banking sector's additional interest rate only increased by 0.06 percentage points. The total loan interest rate rose from about 3.7% to 4.2%, matching the base rate increase of 0.5 percentage points.

This formula was broken starting in the first half of 2019. The additional interest rate, which was 2.13% in June 2019, sharply rose to 2.93% within six months. By June 2021, the additional interest rate had increased to 3.10%. During this period, the base rate dropped from 1.75% to a historic low of 0.50%. It appears that banks raised additional interest rates to minimize losses amid falling base rates.

Even Considering Adjustment Interest Rates, Banks Earned at Least 0.5%P More

Even considering the changed interest rate disclosure method since August 2019, the phenomenon of 'soaring additional interest rates' is clearly evident. Currently, financial authorities separately disclose adjustment interest rates that were previously included in the additional interest rate. The larger the adjustment interest rate, the lower the loan interest rate, and typically high-credit borrowers receive significant benefits. However, even the adjustment interest rate, which was in the 1% range, fell to the 0.5% range in December last year and has remained around 0.7%.

The same applies during periods of base rate hikes. When the Bank of Korea raised the base rate in August 2021, the additional interest rate soared to 3.64% by the end of that year. This year, it has been maintained around 3.4% to 3.5%. Even considering adjustment interest rates, banks have consistently charged about 0.5 percentage points more than in the past, with rates around 2.7%.

Regarding the increased additional interest rates, a banking industry official explained, "Market conditions must be considered," adding, "At a time when loans were rapidly increasing, it was necessary to control the pace, and combined with government and financial authorities' signals to curb household loans, raising additional interest rates was a way to reduce loan demand."

President-elect Yoon Suk-yeol is attending the 2nd Secretariat Meeting of the Presidential Transition Committee at the Transition Committee Office in Tongui-dong, Seoul, listening attentively to the opening remarks of the committee members. Photo by Transition Committee Press Corps

President-elect Yoon proposed the 'disclosure system for the interest rate spread between deposits and loans' and 'review of the appropriateness of additional interest rates' as solutions. While some disclosure of interest rates is made through the Bankers Association, detailed cost disclosures of additional interest rates and comparative disclosures by bank are being discussed.

Within the industry, there are many criticisms that cost disclosure and comparative disclosure lack effectiveness. A representative example is the chicken franchise industry. Since 2017, the Fair Trade Commission's requirement to submit essential item costs and the Ministry of Agriculture, Food and Rural Affairs' chicken price disclosure system have made it possible to estimate the cost of chicken. However, the price of chicken, which was 16,000 won in 2011, rose to 20,000 won last year.

Ultimately, to resolve the issues of increased additional interest rates and the interest rate spread between deposits and loans, there are calls to focus on supervising abnormal 'collusion.' A financial expert who requested anonymity advised, "Cost disclosure neither lowers prices nor is feasible," adding, "The practical approach is for financial authorities to continuously monitor and manage excessive interest rate calculations."

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