Yi Whan-woo is a Korea Times journalist primarily covering finance. He writes in-depth articles on macroeconomy and financial markets and previously covered sports, politics, diplomacy and inter-Korean affairs, among others. Feel free to contact him at yistory@koreatimes.co.kr.
Sugar-coated election pledges could eat into banks' profits
People walk by ATMs of the country's four largest commercial banks — KB Kookmin, Shinhan, Hana and Woori — at a building in Seoul, Jan. 8. Yonhap
By Yi Whan-woo
With the April 10 general elections approaching, politicians are pouring out sugar-coated pledges promising to ease the financial burdens of small business owners and low-income households, which, in turn, could weigh on banks as they will need to cover relevant expenses.
According to industry sources, Wednesday, the government and the ruling People Power Party (PPP) have come up with a string of promises to return interest already paid by bank customers or help them switch to loan services that offer lower interest rates.
The number of beneficiaries is estimated to be nearly 2 million, mostly self-employed, microbusiness owners and low-income households struggling with making repayments as interest rates remain high.
The benchmark interest rate stands at 3.5 percent — the highest since 2008.
The government and the PPP want the commercial banks to bear the relevant costs for their pledges which the sources say will be at least 2 trillion won ($1.5 billion).
Of the total costs, the country’s four major lenders — KB Kookmin, Shinhan, Hana and Woori — will be asked to bear 1.6 trillion won.
“The promises are for a good purpose, but they are reckless in some sense as banks’ profitability can be affected and customers in the long term will be affected, too,” a source said.
The main opposition Democratic Party of Korea is making more drastic pledges. They include completely writing off the interest that targeted borrowers are responsible for paying back, by using trillions of won from banks.
All these promises were made as the banks are heavily criticized for windfall profits they make from high borrowing rates, and are asked to share their profits with society.
“Even so, the promises possibly require more money than the lenders can handle,” another source warned.
The combined net profit of the four major financial groups stood at slightly below 15 trillion won last year, down 3.6 percent from the previous year.