Local banks under fire for usurious practices
Korean banks have again come under fire for making easy money by taking advantage of widening interest margins. Simply put, their way of making money is none other than usury. It is no secret that the lenders have already become loan sharks exploiting borrowers.
According to the Financial Supervisory Service, local commercial banks recorded 13.8 trillion won ($12.1 billion) in net profits last year, up 23.4 percent from 2017. This upbeat performance was the direct result of growing interest income amid rising interest rates.
The interest income hit a record high of 40.3 trillion won in 2018, up 8.2 percent from the previous year, boosted by a rise in the net interest margin and a better loan-deposit spread. The margin increased to 1.66 percent last year from 1.63 percent in 2017 and 1.55 percent in 2016. The spread also rose to 2.06 percent from 2.03 percent in 2017 and 1.95 percent in 2016.
Those figures reveal that domestic banks created their income mostly from lending. Their interest income accounted for 87.8 percent of their total income last year, up from 83.6 percent in 2017. This heavy reliance on interest from lending is certainly a cause for concern as the banks' income is derived mainly from household debt which soared to an all-time high of 1,534 trillion won last year.
It is highly dangerous for banks to depend too much on what is called a ticking time bomb. A large portion of the debt is mortgages. Thus, if the property market tumbles, large sums of household debt will inevitably turn into bad loans. This could create a massive default that could precipitate a collapse of the banking system and a financial crisis.
No one can ignore the risky aspect of the debt. Every household is an average 77.7 million won in debt. This means every Korean owes lenders 30 million won on average. The rate of the total household debt over gross domestic product (GDP) reached an alarming level of 96.9 percent.
This explains why the government has tried to lower the rate in a bid to reduce the potential debt risk. It has also tried to put a strict ceiling on mortgages. This cap is also designed to prevent property bubbles from bursting suddenly.
In a nutshell, the greed of bankers and homeowners has prompted property speculation over the past few years. They have buried themselves in seeking their own profits without paying much attention to credit risks and bubbles.
The present situation is reminiscent of the 1997-98 Asian currency crisis that forced Korea to go cap in hand to the International Monetary Fund (IMF). The question is whether the country learned a lesson from the unprecedented turbulence. If not, Koreans may risk another crisis ― this time an implosion of the local property and financial market.
Both lenders and borrowers will pay the price in the end if they only try to make easy money. They are bound to learn this the hard way. Too bad.
Korean banks have again come under fire for making easy money by taking advantage of widening interest margins. Simply put, their way of making money is none other than usury. It is no secret that the lenders have already become loan sharks exploiting borrowers.
According to the Financial Supervisory Service, local commercial banks recorded 13.8 trillion won ($12.1 billion) in net profits last year, up 23.4 percent from 2017. This upbeat performance was the direct result of growing interest income amid rising interest rates.
The interest income hit a record high of 40.3 trillion won in 2018, up 8.2 percent from the previous year, boosted by a rise in the net interest margin and a better loan-deposit spread. The margin increased to 1.66 percent last year from 1.63 percent in 2017 and 1.55 percent in 2016. The spread also rose to 2.06 percent from 2.03 percent in 2017 and 1.95 percent in 2016.
Those figures reveal that domestic banks created their income mostly from lending. Their interest income accounted for 87.8 percent of their total income last year, up from 83.6 percent in 2017. This heavy reliance on interest from lending is certainly a cause for concern as the banks' income is derived mainly from household debt which soared to an all-time high of 1,534 trillion won last year.
It is highly dangerous for banks to depend too much on what is called a ticking time bomb. A large portion of the debt is mortgages. Thus, if the property market tumbles, large sums of household debt will inevitably turn into bad loans. This could create a massive default that could precipitate a collapse of the banking system and a financial crisis.
No one can ignore the risky aspect of the debt. Every household is an average 77.7 million won in debt. This means every Korean owes lenders 30 million won on average. The rate of the total household debt over gross domestic product (GDP) reached an alarming level of 96.9 percent.
This explains why the government has tried to lower the rate in a bid to reduce the potential debt risk. It has also tried to put a strict ceiling on mortgages. This cap is also designed to prevent property bubbles from bursting suddenly.
In a nutshell, the greed of bankers and homeowners has prompted property speculation over the past few years. They have buried themselves in seeking their own profits without paying much attention to credit risks and bubbles.
The present situation is reminiscent of the 1997-98 Asian currency crisis that forced Korea to go cap in hand to the International Monetary Fund (IMF). The question is whether the country learned a lesson from the unprecedented turbulence. If not, Koreans may risk another crisis ― this time an implosion of the local property and financial market.
Both lenders and borrowers will pay the price in the end if they only try to make easy money. They are bound to learn this the hard way. Too bad.
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