"Reduced Gasan Interest Rate Ineffective... Loan Counters Turn Cold"

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[Asia Economy Reporter Sim Nayoung] As the Bank of Korea's base interest rate rises, the household loan counters at commercial banks are cooling off sharply. Despite commercial banks' desperate efforts to mitigate the ripple effects of the base rate hike, their efforts fall short. They have competitively lowered the additional interest rates on major loan products and significantly increased loan limits compared to early this year, but these measures have not been effective. However, there is cautious analysis that as the decline in household loans slows, banks' loan demand is beginning to stir.

According to the five major commercial banks on the 19th, the outstanding balance of household loans (as of the 15th of this month) was KRW 702.9466 trillion, down KRW 247.1 billion from the end of March (KRW 703.1937 trillion). If the downward trend continues this month, it will mark the fourth consecutive month of decline in household loan balances. A decrease in balance means that new loans are less than the repayments made by borrowers. Specifically, unsecured loans decreased by KRW 257.5 billion, while mortgage loans increased by KRW 195.5 billion.

When loans decrease, the net interest margin (loan interest rate minus deposit interest rate), a major source of income for commercial banks, is impacted. Concerned about this, commercial banks have collectively lowered the loan threshold, but it remains difficult to find borrowers who cross that threshold. No matter how much banks reduce the additional interest rates, the effect is limited during a period of rising interest rates like now.

An official from Bank A said, "When the Bank of Korea's base interest rate rises, the benchmark rates for banks' funding (such as COFIX, bank bonds) also rise accordingly," adding, "Even if banks lower the additional interest rates that generate profits, the overall effect of interest rate reduction is overshadowed, so consumers will not feel the difference."

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Unsecured loans are struggling to gain momentum. For example, Hana Bank raised the limit of its ‘Hana OneQ Unsecured Loan’ from KRW 150 million to KRW 220 million and lowered the additional interest rate by 0.2 percentage points starting from the 12th. However, as of the 19th, Hana Bank's unsecured loan interest rates ranged from 3.55% to 4.15%, which is an overall increase of 1 percentage point compared to a year ago (2.58% to 3.18%).

Other banks have also raised the overdraft account limits from KRW 50 million to up to KRW 300 million and lowered additional interest rates since early this year, but these efforts have been ineffective. A representative from Bank B said, "Due to the Debt Service Ratio (DSR) regulations, increasing the limits is of little use," adding, "When loan inquiries come in and we conduct screenings, there are quite a few cases where there is no additional borrowing capacity."

The situation is similar for mortgage loans. For example, KB Kookmin Bank lowered mortgage and jeonse loan interest rates by up to 0.45 percentage points starting from the 5th, but the overall increase compared to a year ago far exceeds 1 percentage point. As of the 18th, KB Kookmin Bank's variable mortgage loan rates ranged from 3.42% to 4.92%, and mixed rates ranged from 3.97% to 5.47%. These are significantly higher than last April's rates (variable 2.4% to 3.9%, mixed 2.77% to 4.27%). Other commercial banks such as Shinhan Bank, which lowered mortgage loan rates by 0.10 to 0.20 percentage points on the 8th, and NH Nonghyup, which cut rates by 0.30 percentage points, show similar trends.

However, the overall decline in household loans appears to have slowed since April compared to early this year. The decrease in household loans in March was KRW 2.7436 trillion, but as of the 15th of this month, the decrease was only KRW 247.1 billion. A representative from Bank C said, "Since the new government took office, the housing market has been attracting attention, and expectations regarding the feasibility of tax-exempt capital market pledges seem to be reflected," adding, "Since mortgage and unsecured loan repayments mainly occur after payday, we need to monitor the household loan situation until the end of the month."

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