Key rate cut provides no relief to borrowers

By Lee Kyung-min

Many loan-seekers have faced disappointment after mistakenly assuming the borrowing rate at commercial banks would be cheaper after the Bank of Korea (BOK) cut its key interest rate by 25 basis points to a record-low 1.25 percent on Oct. 16.

Some banks pre-emptively reduced or removed benefits for loan seekers in September, reflecting market expectations that the central bank would lower the key base rate amid sagging exports and weakening consumption due to mounting uncertainties both at home and abroad.

“Am I dumb to think that taking out a cheaper loan would be possible after the BOK rate cut? If banks are steps ahead of consumers and allowed to protect their interest income, what good is it for the central bank to lower key rate? It's just senseless,” a 30-year-old man surnamed Park said.

KEB Hana Bank and NongHyup Bank, two of Korea's leading commercial banks, have increased their adjustable home-backed loan rates to between 3.073 and 4.373 percent and between 2.89 and 4.10 percent, respectively, as of Oct. 25.

This means NongHyup upped the rate as much as 0.27 percentage points and KEB Hana 0.592 percentage points from Sept. 17.

“We had to lower the prime rate by 0.5 percentage points because our adjustable rate became lower than the fixed rate, a rather unusual and unexpected occurrence amid the current low interest,” a KEB Hana official said.

This explains the bank's prime rate cut because the borrowing rate is set after considering the key base rate and other benefits granted by each commercial bank including prime rate adjustments.

NongHyup Bank said raising the rate was to help limit the volume of new home-backed loans, in line with the government initiative to prevent the housing market from overheating.

“We offer a relatively lower borrowing rate compared to our competitors, which explains our fastest growth of home-backed loans over the past few years. But we had to make adjustments to comply with the government policy,” a NongHyup official said.

However, many consumers criticized the lenders as they wasted no time lowering deposit rates which reduced the interest income of savings or installment account holders.

NongHyup and KEB Hana are expected to lower the deposit rate soon, a move highly likely to be followed by their three leading peers ― Shinhan, KB Kookmin and Woori.

Despite consumers' frustration, while understandable, lenders cannot disregard the growing default risks amid the economic downturn, according to Yun Chang-hyun, an economist at the University of Seoul.

“The BOK rate cut means the central bank acknowledged the economy is in bad shape. This means the lenders will have to take into consideration increased possible default risks from borrowers. Not to dismiss consumers' frustration, but a higher rate in that sense is somewhat inevitable,” he said.