Value context and insight. lkm@koreatimes.co.kr
Banks under pressure to narrow their loan-deposit interest rate differential
Financial Supervisory Service Gov. Lee Bok-hyun speaks during an audit at the National Assembly in Yeouido, Seoul, Oct. 24. Yonhap
By Lee Kyung-min
Local commercial lenders are expected to narrow their loan-deposit interest rate differential, alarmed by the country’s top financial supervisory authority’s criticism of their practice of raising borrowing cost for their customers despite simultaneously lowering interest payments for savings and term deposit account holders, market watchers said Wednesday.
Central to the development is an uptick in the interest margin from the widening differentials over the past few months, essentially negating the Bank of Korea's October key rate cut.
Also at play is Korea’s household debt relative to GDP ranking among the world’s highest. This is a basis for the financial regulators to implement tighter lending rules with leeway granted to lenders in keeping borrowing costs elevated.
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“The differential remains narrow compared to early this year, but it is widening,” Financial Supervisory Service (FSS) Gov. Lee Bok-hyun said during a meeting of senior officials, Tuesday.
“The central bank's rate cut is being undermined by the widening differential, an undesirable outcome we will continue to monitor.”
A key rate cut translates to a dip in deposit interest rates, well before the banks’ lending rates are adjusted downward, he said.
“We will monitor the rate adjustment path of banks factoring in their liquidity as well as the pace and trajectory of the differential.”
The governor pointed to heightening volatility in the financial markets from within the country and abroad, as illustrated by climbing demand for deposits and bank debentures.
“Please ensure that the effects of monetary easing are felt by the public without delay,” he said.
The central bank lowered the key rate to 3.25 percent in September, down from 3.50 percent, leading to up to a 0.4 percentage point decrease in deposit interest rate at commercial lenders.
Hana Bank lowered the base interest rate on 11 deposit products by a range of between 0.05 and 0.25 percentage points.
Internet-only Toss Bank cut the interest rates for their retail savings account products by as much as 0.3 percentage points.
Standard Chartered Bank Korea lowered the rates by half a percentage point, while NH NongHyup Bank cut by a maximum of 0.3 percentage points.
And yet, fixed mortgage rates are climbing.
The lowest rate offered by the country’s top five lenders stood at 3.75 percent as of Friday, up 0.11 percentage points from 3.64 percent as of end-September.
This was a further increase from September’s lowest rate of 3.946 percent, up from 3.604 percent in August.
Korea fortified macroprudential policy tools including stressed debt service ratio (DSR) measures in September to curb household debt.
The stressed DSR applies add-ons to assess the borrowers’ repayment capacity relative to their income in a hypothetical scenario of a rate hike, thereby reducing the maximum borrowable amount.