Loan Interest Increased by Risk Premium... Could 'Cost and Comparative Disclosure' Be the Solution?

Why Are Loan Interest Rates So High?... Increased by 0.5~1%P
Even Considering Adjusted Base Rates, Additional Rates Keep Rising
Solutions Mentioned: 'Cost Disclosure', 'Price Comparison Publication'
Experts Say "That Won't Lower Prices"

[Asia Economy Reporter Song Seung-seop] It has been identified that banks' additional interest rates have steadily increased since 2019. As the spread between deposit and loan interest rates widened, banks minimized losses during periods of base rate cuts and maximized profits in the opposite scenario, drawing criticism. Although methods such as disclosing costs through resolution bonds or publicly comparing loan interest rates have been suggested, they are pointed out as inadequate solutions to the problem.

Additional Interest Rates 0.5~1%P Higher Than 3~4 Years Ago

According to the Bankers Association on the 2nd, examining the trend of additional interest rates on general unsecured loans from the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) over the past five years revealed that since the first half of 2019, the rates have increased by about 0.5 to 1 percentage point. This means that even with the same base interest rate, the loan interest to be paid has become more expensive.

Bank loan interest rates are calculated by adding an additional interest rate to the loan base rate called COFIX and subtracting an adjustment interest rate. The additional interest rate includes operating costs, risk premiums, target profit margins, etc., while the adjustment interest rate includes discounts for subsidiary transactions such as salary transfers or adjustments by headquarters and branches. For example, if the base rate is 1%, the additional interest rate is 3%, and the adjustment interest rate is 0.5%, the final interest rate becomes 3.5% (1% + 3% - 0.5%).

The additional interest rate in the banking sector only increased from 2.26% to 2.32% between December 2016 and the end of 2018. During this period, the base rate announced by the Bank of Korea rose from 1.25% to 1.75%, but the banking sector's additional interest rate remained at a certain level. The loan interest rate also rose from about 3.7% to 4.2%, increasing only by the amount of the base rate.

This formula was broken starting in 2019. The additional interest rate, which was 2.13% in June 2019, sharply rose to 2.93% within half a year. By June 2021, the additional interest rate alone reached 3.10%. During this period, the base rate dropped to a historic low from 1.75% to 0.50%. It appears that banks raised the additional interest rate to minimize the reduction in loan interest rates despite the falling base rate.

Even considering the change in interest rate disclosure methods from August 2019, the trend remains the same. Financial authorities began to separately disclose the adjustment interest rate, which had been included in the additional interest rate. Since the adjustment interest rate is a negative (-) item and is separately classified, it has increased. However, 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 is also formed around 3.4~3.5%. Even considering the adjustment interest rate, banks are receiving about 0.5 percentage points more additional interest rate than in the past, at around 2.7%.

The adjustment interest rate is also on a decreasing trend. The larger the adjustment interest rate, the lower the loan interest rate. Typically, high-credit borrowers receive greater benefits. The adjustment interest rate, which was in the 1% range in 2019, dropped to about 0.5% in December last year and has remained in the 0.7% range since then.

"Even If Costs and Comparisons Are Disclosed, Prices Are Hard to Lower"

The banking industry states that market conditions and financial authorities' regulations must be considered. They explain that since the government recommended suppressing household loans amid high loan demand, banks had no choice but to raise additional interest rates. A banking industry official said, "The components for calculating additional interest rates include various variables from operating costs to the target profit margin that financial companies want to achieve," adding, "Banks' funding costs have increased, and the uncertainty caused by COVID-19 and the implementation of financial authorities' regulations also had an impact."

President-elect Yoon Suk-yeol is delivering a greeting at the 1st plenary meeting of the National Unity Committee held in the main conference room of the Presidential Transition Committee set up at the Korea Institute of Finance in Jongno-gu, Seoul, on the morning of the 1st. / Photo by Transition Committee Press Corps

The sharply increased additional interest rate has been pointed out as the main cause of the spread between deposit and loan interest rates, prompting even the political sphere to take action to resolve the issue. President-elect Yoon Seok-yeol has already promised the 'deposit and loan interest rate disclosure system' and 'review of the appropriateness of additional interest rates.' Some voices even call for cost disclosure, increasing concerns within the banking sector.

Industry and experts are negative about cost disclosure or comparison disclosure methods. Price disclosure is ineffective, and disclosing costs does not necessarily lead to price reductions. A representative example is the chicken industry. In 2017, the Fair Trade Commission requested 50 brands, including the chicken industry, to submit the costs of essential items. Essential items are those that franchisees must purchase from headquarters. In the same year, the Ministry of Agriculture, Food and Rural Affairs also started a chicken price disclosure system.

Although it became possible to estimate the cost of chicken prices in detail, chicken prices have continued to rise. According to the Korea Broiler Association, the price of chicken, which was 16,000 won in 2011, rose to 20,000 won last year. This is because the proportion of chicken cost in various costs is only about 20%. Compared to 2017, the price of live chicken decreased from 2,560 won to 2,090 won. On the other hand, the minimum wage and delivery app fees increased by about 5,000 to 6,000 won. It was the changed market environment, not the cost, that raised chicken prices.

Moreover, banks already disclose the loan interest rate calculation method through the Bankers Association. There is a pessimistic view that prices are unlikely to decrease even if comparisons are made by ranking. There is also a method to disclose detailed costs of additional interest rates, but it includes critical trade secrets, which may face strong opposition from banks.

Ultimately, advice suggests that to solve the problem of increased additional interest rates and the spread between deposit and loan interest rates, supervision of abnormal 'collusion' should be focused on. Using the authority of financial authorities to continuously monitor the banking sector's additional interest rate system and intervene if it is excessive is the approach. A financial expert who requested anonymity said, "From the perspective of financial consumers, it is understandable to feel that the banking sector's additional interest rates are excessive," but pointed out, "Costs or disclosures neither reduce prices nor are feasible." He added, "The realistic solution is for financial authorities to continuously observe and manage and supervise excessive interest rate calculations."

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