Gyeonggi-do in Trouble... Companies Face 'Double Burden' of High Loan Interest Rates

Financial Authorities Pressure Banks to Lower Interest Rates
Household Loan Rates Cut First
Corporate Loan Rate Reductions Lag Behind

As of January, the corporate loan interest rates at commercial banks were found to be up to 0.4 percentage points higher than household loan interest rates. According to the consumer portal disclosure by the Korea Federation of Banks on the 25th, the pace of interest rate cuts for corporate loans, including loans to self-employed and small and medium-sized enterprises (SMEs), was much slower than that for household loans. This is because, depending on the bank, the reduction in corporate loan interest rates was smaller than that for households, or the increase was more significant. Despite financial authorities and banks pouring out financial support measures for SMEs, they appear relatively neglected in terms of interest rates.

The Decline in Corporate Interest Rates is Half That of Households Due to Increased Corporate Loan Risks Amid Economic Downturn

Compared to December last year, in January this year, Woori Bank’s household loan interest rate dropped by 0.41 percentage points (from 5.73% to 5.32%), whereas corporate loan interest rates fell by only 0.21 percentage points (from 5.79% to 5.58%). Hana Bank’s household loan rates decreased by 0.33 percentage points (from 5.35% to 5.02%), but corporate loan rates fell by just 0.17 percentage points (from 5.64% to 5.47%). Shinhan Bank also saw a larger decline in household loans at 0.32 percentage points (from 5.30% to 4.98%) compared to corporate loans at 0.27 percentage points (from 5.64% to 5.37%).

NH Nonghyup Bank’s loan interest rates increased during the same period. Household loan rates rose by 0.15 percentage points (from 4.77% to 4.92%), while corporate loan rates jumped by 0.35 percentage points (from 4.86% to 5.21%). Only Kookmin Bank saw corporate loan rates decrease by 0.2 percentage points (from 5.82% to 5.62%) while household loan rates increased by 0.19 percentage points (from 5.09% to 5.28%), but in terms of corporate loan interest rates, it was the highest among the five major banks.

Why are corporate loan interest rates higher than household loan rates? It is because financial authorities’ pressure to lower rates is focused on households, and as the economy worsens, banks reflect the increased risk of loan defaults by charging relatively higher rates to corporate borrowers.

A representative from a commercial bank explained, "For household loan interest rates, the rate is set by adding a bank margin (spread) to the base rate and then subtracting preferential rates. Recently, household loan rates have been lowered by reducing this spread. However, for corporate loans, the situation varies greatly by industry, and as the economy deteriorates, banks have no choice but to raise the spread for industries with bleak prospects."

Banks Accumulate Additional Provisions Mainly Due to Corporate Loans

Self-employed Borrowers with High Interest Burden See Loan Decline for 5 Consecutive Months

Banks are also accumulating additional loan loss provisions to prepare for default risks under the direction of financial authorities, mainly due to corporate loans rather than household loans. Since mortgage loans are secured by collateral, the need for provisions is lower, but corporate loans, which have a smaller collateral ratio and a higher credit component than household loans, are in a different situation.

Another bank official said, "From the bank’s perspective, they have to accumulate a lot of provisions because of corporate loans, so it feels unfair if they cannot charge the proper interest rates. Financial authorities understand this and tell banks to support small business owners, but they do not demand drastic cuts in corporate loan interest rates like they do for household loans."

Loans to self-employed individuals, who face a heavy interest burden, have been declining for five consecutive months. As of the 20th, the outstanding balance of personal business loans at the five major banks was 312.7035 trillion won. This is 2.5644 trillion won less than the peak of 315.2679 trillion won recorded in September last year.

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