Pressure from the 'Geumrigamdogwon'... Why Loan Interest Rates Have Dropped but Are Not Felt

'Financial Supervisory Service' Recently Called 'Interest Rate Supervisory Service'
Variable Interest Rates Lowered from the 16th Due to Interest Rate Control
Existing Yeongkkeul Borrowers Will Feel the Reduction After Half a Year

Lee Bok-hyun, Governor of the Financial Supervisory Service, is delivering opening remarks at a meeting with bank presidents held on the 18th at the Bankers' Hall in Jung-gu, Seoul. Photo by Hyunmin Kim kimhyun81@

[Asia Economy Reporter Sim Nayoung] These days, people in the banking sector refer to the Financial Supervisory Service as the 'Interest Rate Supervisory Service.' This is because throughout the interest rate hike period that began last year, they repeatedly shouted "Raise the interest rate! Lower the interest rate!" The name has lived up to its reputation. From the 16th, the variable interest rates on mortgage loans at commercial banks dropped by 0.47 percentage points compared to the previous day. This was thanks to the COFIX (Cost of Funds Index), the benchmark for banks' variable interest rates, falling from 4.29% in January to 3.82% this month.

The reason COFIX declined is that the financial authorities lowered deposit and savings interest rates starting November last year to prevent funds from concentrating excessively in banks. The stabilization of the bond market, which led to a drop in bank bond yields, also contributed. COFIX is the weighted average interest rate of funds raised by eight domestic banks. It reflects changes in banks' deposit, savings, and bank bond interest rates. When COFIX falls, the cost for banks to raise funds decreases, which in turn lowers loan interest rates. Conversely, when COFIX rises, the opposite occurs.

Variable interest rates at commercial banks on the 16th fall to 4.32~6.42%, back to levels seen in October last year

The variable mortgage loan interest rates (as of the 16th) at the five major banks (KB Kookmin, Shinhan, Hana, Woori, NH Nonghyup) ranged from 4.32% to 6.42%. A representative from a commercial bank said, "This is a similar interest rate level to October last year," adding, "Compared to the upper limit of 8% in January, the rates have dropped sharply in a short period."

The issue is the perceived speed of change. People still feel that interest rates are high due to the time lag in applying the rates. For those buying new homes, comparing last month's and this month's rates makes it clear that rates have dropped, but it's different for existing borrowers who have maximized their borrowing. This is because variable interest rates are adjusted every six months.

For example, borrowers who had their rates adjusted in August last year will receive new rate notifications this month. Even though February's COFIX (3.82%) is lower than the previous month, it is still 1 percentage point higher than August last year's COFIX (2.9%). In this case, for these borrowers, the variable interest rate applied from this month will be at least 1 percentage point higher than six months ago.

Another commercial bank official said, "Overall, it takes about half a year for borrowers to feel the effect of interest rate cuts," adding, "People who had their rates set when COFIX peaked in December last year will need time until June this year, when new rates are applied, to feel the impact of the rate cuts."

Pressure to lower interest rates expected to remain strong this year

From the deposit side, as interest rates have fallen, the benefits to the public have clearly decreased. The interest rates on major fixed deposit products at the five major banks have all dropped to the 3% range. Accordingly, the fixed deposit balances at these banks decreased by 6.2 trillion won during January alone.

The Financial Supervisory Service plans to firmly quell the controversy over banks' 'interest profiteering' with this opportunity. In its '2023 Inspection Operation Plan,' the Financial Supervisory Service defined the recent record-high profits made by banks as an "unreasonable practice riding on market volatility." Accordingly, it stated, "We will inspect whether there are unreasonable loan interest rates and fee charges, and the appropriateness of the operation of the right to request interest rate reductions."

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