Local banks rush to raise lending rates

By Cho Jin-seo

Staff reporter

Local banks have rushed to raise interest rates on loans, including credit-based lending and mortgages, spawning fears that many overleveraged borrowers are going to go belly up due to snowballing interest burden.

The move came after the central bank lifted its key interest rate on July 9, the first rate hike in 17 months. What is of more concern is that additional key rate hikes are expected to come to curb rising inflationary pressure.

Major banks have recently readjusted their interest spreads so that they can reflect the 0.25 percentage point increase in the Bank of Korea’s base rate. Accordingly, money is flowing rapidly into bank deposits, while the interest burden on borrowers is feeling heavier.

Last week, according to Yonhap news agency, Citibank Korea raised its loan interest rate for office workers by up to 0.12 percentage points. Customers applying for three-month loans now need to pay 7.76 percent interest when calculated annually, up from the previous rate of 7.64 percent. The rate for one-year loans for office workers has also been raised by 0.07 percentage points to 7.91 percent.

Other products, such as low-credit loans for self-employed customers, also saw an interest rate rise of around 0.1 percentage points.

At Hana Bank, the rate for credit-based loans had already increased by 0.2 percentage points last month. On top of that, there was another 0.12 percentage point increase this month. So the bank’s lending rate is now between 5.91 and 8.10 percent per year for credit-based loans, and is between 4.3 and 6.47 percent for home-backed loans.

According to the Bank of Korea (BOK), banks have raised rates for certificate of deposit (CD)-based mortgages by 0.17 percentage points on fixed-rate, fixed-term products right after the central bank announced its rate change.

In the case of mortgages with variable rates, the rate has increased as much as 0.34 percentage points over the past two months. Corporate loans, too, are beginning to see a climb in the interest rate, though they are slower to change than loans for households.

The central bank’s base rate is now 2.25 percent, and many believe it will go a few notches higher within the year. It had been set at the record-low of 2 percent for 16 months until July, as the central bank tried to fight the recession by stimulating spending in the economy. Before the crisis, the base rate was around 5 percent.

A low interest rate usually leads to low bank deposits and more consumer spending. Central banks use their base rate to control the pace of the economy in this way, which is called the monetary policy.