[Base Rate 3%] Savings Banks in Emergency, No More Interest Rate Hikes Possible

Bank of Korea Raises Base Rate by 0.50%P to 3.00%
Savings Banks' Household Loan Ceiling Already at 20%
Hard to Raise Mid-Credit Interest Rates Due to Regulations
Worries Over Costs Hinder Raising Deposit Rates Behind Banks

[Image source=Yonhap News]

[Asia Economy Reporter Song Seung-seop] The Bank of Korea's big step has triggered alarm bells in the savings bank industry. Due to the legal maximum interest rate (20% per annum), it is difficult to raise loan interest rates, but they have to increase deposit interest rates that have been overtaken by commercial banks. Some savings banks have decided to reduce loans to low-credit borrowers as a last resort, raising concerns that the loan cliff phenomenon for financially vulnerable groups may worsen.

On the 12th, the Monetary Policy Committee of the Bank of Korea decided to raise the base interest rate by 0.50 percentage points to 3.00%. This is the first time in 10 years that the base rate has exceeded 3%, and the Bank of Korea has raised the base rate five consecutive times for the first time since its establishment.

While the base rate hike increases net interest margin (NIM) and acts as a business boon, the savings bank industry is not welcoming it. It is difficult to raise loan interest rates for low-credit borrowers. The loan interest rates for low-credit borrowers have already reached the legal maximum interest rate of 20% due to the sustained base rate hike trend over several months. In a high-interest rate environment, the risk of default by low-credit borrowers increases, and if this is reflected in bad debt costs or risk premiums, the interest rate would far exceed the legal maximum, according to industry insiders.

According to the household credit loan interest rates by credit score disclosed last month by the Korea Federation of Savings Banks, SBI Savings Bank, the largest in asset size, offered an average loan interest rate of 16.29% to borrowers with credit scores between 501 and 600. At OK Savings Bank, the highest interest rate segment was for credit scores between 301 and 400, with an average rate of 19.3%, and Welcome Savings Bank had 19.9% (401?500 points). Considering these are average figures, many loans are likely executed at the maximum interest rate.

Steepening Loan Cliff for Low-Credit Borrowers

It is also impossible to raise loan interest rates for medium-credit borrowers due to regulations. In May last year, the Financial Services Commission revised the private mid-interest loan regulations, announcing that loans must be executed for borrowers in the lower 50% credit score bracket (grade 4 or below) and that savings banks have an interest rate cap of 16%. Exceeding 16% removes incentives for mid-interest loan operations and is considered handling high-interest loans. In the second quarter of this year, the upper limit of private mid-interest loans at the five major savings banks (SBI, OK, Korea Investment, Pepper, Welcome) already hit 16%. Among the 31 institutions disclosed by the Korea Federation of Savings Banks, 14 (45.1%) have a mid-interest loan upper limit of 16%, and 25 (80.6%) exceed 15.9%.

Rising funding costs are also a challenge. Savings banks find it difficult to issue bonds and must rely on customer deposits to cover funding. As the base rate rises, they must increase deposit interest rates to attract funds. Commercial banks have introduced deposit products with interest rates in the high 4% range, surpassing savings banks. To catch up, savings banks must significantly raise deposit interest rates, but in a situation where loan operations are difficult, this risks increasing the scale of deposit liabilities.

The savings bank industry widely expects that lending to low-credit customers will decrease further. Unlike some large savings banks with a low-margin, high-volume business strategy and advanced credit scoring systems (CSS), there is no way to lend to low-credit borrowers in a high-interest rate environment. It is impossible to lend at a loss, and there is a risk that the scale of bad debts and delinquencies could increase. Some savings banks have prioritized loan asset management over business expansion in their plans for next year. This has raised concerns that financially vulnerable groups will find it even harder to obtain loans from regulated financial institutions.

An official from a savings bank lamented, “Loan interest rates for low-credit borrowers have become so high that it is difficult to raise them further,” adding, “Although profit margins will shrink, the only option is to gradually reject loans starting with lower-tier borrowers.”

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