[Song Seungseop's Financial Light] Soaring Loan Interest Rates Begin to Decline and Why

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[Asia Economy Reporter Song Seung-seop] Major banks are gradually lowering their loan interest rates. This is despite growing uncertainties and risks, and the benchmark interest rate is expected to continue rising. Moreover, the strengthened total household loan volume regulations by financial authorities remain in place. So why are banks lowering loan interest rates?

On the 5th, KB Kookmin Bank reduced interest rates on mortgage and jeonse (long-term rental deposit) loans. The interest rate on KB’s mixed-type mortgage loan (fixed rate) product dropped by 0.45 percentage points, and the variable rate product decreased by 0.15 percentage points. NongHyup Bank also lowered mortgage loan rates by 0.3 percentage points, Woori Bank cut mortgage and jeonse loan rates by 0.2 percentage points each, and Shinhan Bank implemented measures to reduce mortgage and jeonse loan rates by up to 0.28 percentage points.

This contrasts with the trend of rising loan interest rates that continued until early this year. As of the end of March, the mixed-type mortgage loan interest rates at the five major banks had risen to between 4% and 6.01% per annum. The mortgage loan rate surpassing 6% was the first occurrence in 11 years. Credit loan rates for top-tier borrowers also approached 5%, increasing by about 0.05 to 0.10 percentage points monthly.

The sharply rising interest rates began to decline because household loan balances dropped sharply. Household loans are a core foundation of bank operations in South Korea. However, customers started to hesitate to borrow due to the already high interest rates. At the end of last month, the household loan balance at the five major banks was 703.1937 trillion won, down by 2.7436 trillion won from the previous month. This marks the third consecutive month of decline since the beginning of this year, an unprecedented event since statistics began in 2004.

There is also analysis that expectations of a possible lifting of total household loan volume regulations have been reflected. Last year, financial authorities advised banks not to increase household loans beyond a certain level. To curb explosive loan demand, banks controlled the pace of household loan growth by raising additional interest rates or abolishing preferential rates.

However, within the industry, there is growing sentiment that loan regulations have effectively lost their meaning. This is because President-elect Yoon Seok-yeol has made easing loan regulations a key pledge to the financial sector. During his election campaign, he criticized the total volume regulation as a “typical Moon Jae-in-style reckless ideological policy.”

The rapidly widening interest rate spread between deposits and loans may also have had an impact. According to the Bank of Korea, in February, the difference between the total loan interest rate and deposit interest rate at deposit banks was 2.27 percentage points. This is the highest in 2 years and 8 months since June 2019. There is also interpretation that banks were conscious of this because President-elect Yoon threatened to regularly disclose banks’ deposit-loan interest rate spreads.

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