The Bank of Korea announced last week that the outstanding debt extended to households and businesses amounted to 4,540 trillion won ($3.7 trillion) at the end of last year. It was the largest figure ever recorded in the time since relevant data began to be compiled in 1975. The ratio of debt to nominal GDP hit an all-time high of 220.8 percent.
While the nation's private sector has fallen into an abyss of debt, banks and other financial firms have been making easy money, capitalizing on the widening gap between rates on loans and various savings accounts. Banks' loan-deposit margins widened to 2.24 percentage points as of January this year, the highest in 30 months.
In particular, the combined interest income of the four major commercial banks ― Kookmin, Shinhan, Woori and Hana ― came to 24 trillion won, up 12 percent from a year earlier. Their handsome gains are attributed largely to the their quickness to raise rates on loans but slowness to increase rates on certificate of deposit accounts, at this time when the central bank is gearing up to lift its benchmark rate serially in order to tame inflation. The four banks' fixed interest rates on mortgage loans have exceeded 5 percent, whereas their interest rates on one-year-term certificate of deposit accounts remain below 2 percent.
This discrepancy in interest rates has resulted in more profits for banks but greater burdens on borrowers. Self-employed business owners, in particular, are being hit hard by the economic fallout of the pandemic. Of them, 780,000 are in the red and their combined financial liabilities exceed 177 trillion won.
Against this backdrop, the financial authorities are ready to take action, saying that the loan-deposit margin has widened beyond a reasonable level. President-elect Yoon Suk-yeol pledged to adopt a periodical disclosure system for those margins during his campaign. Such a system would likely pave the way for regulators to intervene in determining interest rates in the future. However, banks remain complacent with setting wide margins between the interest rates for loans and deposits for their own benefit. The time has come for the banks to look for ways to set a reasonable loan-deposit margin on their own to share the burden with households and small businesses.