Banks claim cooperation... Loan interest rates for individuals and businesses both hit 'highest in 10 years'

Financial Holding Chair and Financial Authorities to Announce Win-Win Plan
Benefits So Far Focused on New Borrowers
Existing Borrowers Fully Bear Interest Rate Hike Shock
Large and Small-Medium Enterprises, Mortgage and Credit Loan Interest Rates Reach Highest in 10 Years

Interest rates for existing borrowers, including large corporations, small and medium-sized enterprises, variable-rate mortgage loans, fixed-rate mortgage loans, and credit loans, have reached the highest level in 10 years. Following President Yoon Seok-yeol's remark about 'being a servant to banks,' financial authorities have demanded win-win measures from commercial banks, leading banks to lower interest rates. However, this remains a distant story for existing borrowers.

Next week, the chairpersons of the five major financial holding companies will meet with the Financial Services Commission chairman and the Financial Supervisory Service chief to announce win-win measures targeting households and businesses. Originally scheduled for the 16th, the meeting was postponed. The focus will be on interest rate reductions and financial support for vulnerable groups. Until now, the win-win measures announced by banks have concentrated on new borrowers in the case of household loans. For small and medium-sized enterprises or small business owners, there have been some support measures for existing borrowers, but mainly targeting certain vulnerable groups. Meanwhile, existing borrowers have had to fully absorb the shock of rising interest rates.

Benefits Concentrated on New Loans Only, Existing Loans Excluded

According to the Bank of Korea's Economic Statistics System, the deposit banks' loan interest rate (based on outstanding balance) for general credit loans was 6.40% last September, the highest since October 2013. In January last year, it was 3.89%, marking a 2.51 percentage point increase. The variable-rate mortgage loan interest rate was 4.72%, the highest since January 2013. Fixed-rate mortgage loans (3.56%) were also at their highest since March 2015 (3.62%).

The same applied to corporate loans. The interest rate for small and medium-sized enterprise loans was 5.32%, peaking since April 2013 (5.32%). Small business owners are included in the SME category. In January 2022, it was in the 3% range at 3.19%, but it has risen by 2.13 percentage points since then. The interest rate for large corporations (5.08%) was also the highest since February 2013 (5.12%).

A senior official from the Financial Supervisory Service said, "Although banks have continuously proposed win-win measures since the interest rate hike began last year, most were focused on new borrowers, and existing borrowers were not included. This is why the public did not feel that benefits were evenly distributed."

The reason banks and financial authorities have been reluctant to introduce interest rate reduction measures for existing borrowers is clear. A commercial bank official explained, "Banks operate and conduct business based on existing loans, so cutting those interest rates shakes the foundation, reducing predictability in management and causing significant damage. Therefore, interest rate reduction measures have focused only on new loans."

Delinquency Rates for Existing Loans Rise... Opposition Party Pushes Windfall Tax Bill

Due to this background, as interest rates for existing borrowers continue to rise, delinquency rates are also increasing. In particular, the delinquency rate for small business owners mentioned by President Yoon is among the highest across all loan sectors, along with the delinquency rate for small and medium-sized corporations. According to the Financial Supervisory Service, as of August, the delinquency rate for small and medium-sized corporations rose by 0.08 percentage points month-on-month (from 0.51% to 0.59%), and the delinquency rate for individual business loans increased by 0.05 percentage points (from 0.45% to 0.50%).

A corporate loan officer at a commercial bank said, "Among small and medium-sized enterprises that previously took out loans, there is a noticeable increase in companies unable to cope with the continuous rise in interest rates and falling into delinquency. Due to this year's export slump, the number of marginal companies centered around industrial complexes is increasing."

Meanwhile, the Democratic Party of Korea is pushing a 'windfall tax' bill that would impose a levy on banks if they earn interest income above a certain threshold. On the 14th, Representative Kim Seong-ju, the senior deputy chair of the Democratic Party's Policy Committee, proposed the 'Financial Consumer Protection Act Amendment,' which is expected to be adopted as party policy. The core of this bill requires financial companies to pay a win-win finance contribution of up to 40% of the excess net interest income if their net interest income exceeds 120% of the average over the previous five years.

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