Korean banks face losing credibility as irregularities and mishaps rise and the number of punished financiers has more than doubled from a year earlier, market watchers said Monday.
The credibility of South Korean financial institutions has been marred by corruption and bad business practices, including banks' alleged fixing on rates on 91-day certificates of deposit (CD), a benchmark money market rate for household lending.
The country's antitrust watchdog has been investigating local brokerage houses and banks over alleged collusion of rigging CD rates after those rates appeared to be stuck at the same level for about three months despite falls in other market rates.
As of Aug. 10, 447 officials had been disciplined for misconduct found via inspections by the Financial Supervisory Service (FSS), more than doubling from 222 the previous year, according to the regulator.
A high-ranking official at Woori Bank was arrested recently and faces trial on charges of embezzling around 3.1 billion won ($2.74 million) of customers' money. Top lender Kookmin Bank was found to have manipulated documents on home loans and Shinhan Bank used to give discriminatory spread on lending rates after reviewing borrowers' academic backgrounds.
Non-banking institutions are not an exception with officials from ailing savings banks arrested for bribing politicians in hopes of avoiding suspension of their operations.
"The underlying reason for why the local financial sector loses customers' confidence is that banks heavily rely on interest income for stable revenue sources, turning a blind eye to supporting households and smaller firms," said Lee Phil-sang, a professor at Korea University.
Most Korean banks depend heavily on interest income by charging higher spreads on lending rates, drawing public discontent that they prey on households and smaller firms as lending rates remain higher despite falling market rates.
The weight of interest income accounts for around 86.5 percent of local banks' total profits, according to data by the FSS.
"Local banks' profits mostly are generated from spread between deposit and lending rates. Their greed is amplified by charging higher lending rates when consumers are most in need of their help," said Kang Hyung-koo, an official at the Korea Finance Consumer Federation, a consumer advocacy group.
In October 2011, local activists and consumers staged rallies in Yeouido, Seoul's main financial district, as part of the "Occupy Wall Street" movement, urging the local financial industry to abandon its greed and risky practices.
Experts say the local financial sector has much improvement to make as banks are still wary of lending to those who are financially disadvantaged.
Mindful of public criticism, Korean banks are making efforts to restore the lost confidence of customers, by lowering spread on lending rates and cutting commissions, according to bank officials.
However, experts said the efforts fall short of regaining credibility, and also called for the financial watchdog to beef up its supervision. A series of embezzlements at some savings banks and the involvement of officials at the FSS show how lax the financial supervision was, they said.
Local banks underwent massive takeover moves in the aftermath of the 1997-98 Asia-wide financial crisis and their holding of high short-term external debt was a major headache in the midst of the 2008 global financial turmoil as they were found to be vulnerable to external shocks. (Yonhap)