Deposit rates rise but loans are cautious... Banks troubled by 'interest profiteering' controversy?

Criticism of 'Interest Business' Spurs Faster Deposit Rate Hikes... Loan Rates Surprisingly Lowered?
"Interest Rate Increase Was Expected, Proactive Response" Also Praised

[Image source=Yonhap News]

[Asia Economy Reporter Yu Je-hoon] The banking sector, embroiled in controversy over "interest profiteering," finds itself in a dilemma. While deposit interest rates such as savings and time deposits are being rapidly raised in response to the base interest rate hike, the revision of the disclosure system revealing the interest rate spread between loans and deposits has made it difficult to fully reflect the base rate increase in household loan interest rates. Some banks have even lowered loan interest rates before the base rate hike.

According to the financial sector on the 28th, the five major commercial banks (KB Kookmin, Shinhan, Woori, Hana, and NH Nonghyup) announced on the 25th that they would raise the interest rates on regular savings and time deposit products by up to 0.30 to 0.50 percentage points (P) each. This came less than a day after the Bank of Korea raised the base interest rate by 25 basis points (1bp=0.01%).

The reason banks are responding so promptly to the base rate hike is attributed to the intensifying controversy over interest profiteering this year. As loan interest rates rise, criticism has emerged that deposit interest rate increases are relatively slow. In response, banks have been raising deposit interest rates not only on the day of the base rate hike but even ahead of it this year.

A financial sector official said, "The increase in deposit interest rates is not actually slower than the rise in loan interest rates (as public perception suggests), but it likely reflects the recent atmosphere," adding, "The recent revision of the disclosure system, which quantifies each bank's interest rate spread, also has some influence."

On the other hand, despite the base rate hike, there is a noticeable trend of lowering loan interest rates. Shinhan Bank lowered personal credit loan interest rates by 0.30 to 0.50 percentage points starting from the 24th, and also reduced fixed and variable rates on mortgage loans for living stabilization funds by 0.2 and 0.1 percentage points, respectively. KB Kookmin Bank also lowered the interest rate on its mixed-rate (fixed type) mortgage loan product by 0.20 percentage points on the 25th. NH Nonghyup Bank introduced preferential interest rates of up to 0.50% on loans for low-income borrowers starting the day before. Despite tightening funding conditions, loan interest rates are being adjusted downward.

The cause is attributed to the recently revised disclosure system for the interest rate spread between loans and deposits. The interest rate spread refers to the difference between the average interest rate on new loans handled by banks in a month and the interest rate on savings deposits. The larger the difference, the more it implies successful interest profiteering. According to the Bankers Association's disclosure on the 22nd, the household interest rate spreads by bank were Shinhan Bank 1.62%P, Woori and NH Nonghyup Banks 1.40%P, Kookmin Bank 1.38%P, and Hana Bank 1.04%P, respectively.

Of course, some banks have yet to adjust loan interest rates. A Woori Bank official said, "As we entered the rate hike period, new borrowers clearly prefer fixed rates, and our bank already lowered the mixed-rate (fixed type) mortgage loan by 0.60 percentage points between May and June," adding, "We will monitor future trends before deciding on further rate adjustments."

Within the industry, there is also an interpretation that some banks are taking preemptive defensive measures, as loan interest rate hikes are inevitable following the base rate increase. A representative from a commercial bank said, "Since the Bank of Korea's baby step (25bp) was already a foregone conclusion as of the 25th, some banks may have offset this by announcing preemptive rate cuts," adding, "The more interest rates rise, the more banks' margins inevitably increase, which provides grounds for criticism of interest profiteering. Therefore, detailed interest rate adjustments will inevitably continue."

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