Loan Proportion Linked to Deposit Interest Rates Hits 6-Year High... Banks Benefit Even as Deposit Rates Rise

Increase in Savings and Deposit Interest Rates Ultimately Leads to Loan Interest Rate Hike
Structure Where Customers with Many Loans Support Those with Many Deposits
Burden on Vulnerable Borrowers Rises... "Direct Support Measures Needed"

[Image source=Yonhap News]

[Asia Economy Reporter Minwoo Lee] Banks are raising deposit and savings interest rates under pressure from authorities and the political sphere to curb 'interest profiteering.' However, since the proportion of loans linked to deposit product interest rates has reached its highest level in six years, this ultimately leads to an increase in loan interest rates. This is why there are criticisms that banks' 'interest profiteering' remains largely unaffected.

According to the Bank of Korea on the 19th, the proportion of household loans linked to deposit interest rates (based on outstanding balance) at deposit banks reached 42.7% in May. This is the highest level in six years since June 2016, when it was 43%.

For loans linked to deposit interest rates, increases in deposit rates lead to rises in loan interest rates after a time lag. Considering that the outstanding balance of loans linked to deposit interest rates is larger than the amount of new deposits, even if banks immediately raise deposit and savings interest rates, their interest income can still increase. In fact, in May, out of the total household loan balance of 1,060.6 trillion KRW at banks, loans linked to deposit interest rates amounted to about 453 trillion KRW. The increase in fixed deposits at banks in May was 18.839 trillion KRW. Ultimately, the increase in new deposit interest rates applies to the several trillion won increase in deposits in that month, and after a time lag, the interest rates on a much larger outstanding loan balance rise accordingly, resulting in increased bank interest income.

Loans linked to deposit interest rates increase the burden on existing borrowers rather than new ones as deposit rates rise. If multiple banks simultaneously raise deposit interest rates, this phenomenon can worsen. Commercial banks have already been consecutively raising deposit interest rates. Since the beginning of this month, Hana Bank has decided to raise deposit and savings interest rates by up to 0.9 percentage points (p). Woori Bank and NH Nonghyup Bank also announced plans to raise deposit and savings interest rates by up to 0.80 p and 0.6 p, respectively.

If this trend accelerates, concerns about vulnerable borrowers are expected to grow. Typically, vulnerable borrowers have larger loan amounts than deposits, so they are unlikely to benefit from deposit interest rate increases and may only face increased loan interest burdens. Kim Eun-gap, a researcher at IBK Investment & Securities, explained, "Ultimately, raising deposit interest rates may mean increasing the burden on financial consumers with more loans by raising the deposit interest rates for those with more deposits." He added, "More direct support policies, such as interest rate reductions for vulnerable borrowers and expanded preferential interest rates, would be more effective."

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