Installment savings failing to attract clients despite interest rate hike

A sign shows personal credit loan services offered at a branch office of a major bank in Seoul, in this photo taken in July 2021. Korea Times file

By Yi Whan-woo

Major commercial banks are seeing a decline in the amount of money deposited in installment savings accounts, despite offering higher retail deposit rates following key interest rate hikes by the central bank.

As their basic term deposits are seeing a continuous inflow of cash, industry watchers explain that it shows that the middle- and lower-class households can't afford to save in the long term because their funds are being funneled into daily living expenses amid inflation.

The increased retail deposit rates are applicable to both installment savings and term deposits. But the former requires the account holder to build up savings by making fixed monthly deposits instead of an initial one-time deposit.

According to market observers, the deposits in installment savings accounts of the five major banks combined ― KB Kookmin, Shinhan, Hana, Woori and NH NongHyup ― inched down 1.6 percent to 34.54 trillion won ($28.97 billion) from December 2021 to January.

By bank, deposits in installment savings accounts of KB Kookmin fell from 12.15 trillion won to 11.98 trillion won, NH NongHyup from 7.02 trillion won to 6.9 trillion won, Shinhan from 5.98 trillion won to 5.85 trillion won, Hana from 5.77 trillion won to 5.72 trillion won and Woori from 4.15 trillion to 4.08 trillion won.

During the cited period, the five's combined deposit amount in their term deposits increased by 1.8 percent to 666.7 trillion won.

January was when the Bank of Korea (BOK) raised the benchmark rate to 1.25 percent, following the two hikes last year in August and November, bringing the rate back to the pre-pandemic level.

“The fact that the people are turning away from installment savings accounts shows that they no longer rely on banks to earn a lot of money,” an industry analyst said, noting the low-income earners and those who are in the beginning stages of their careers used to favor installment savings to build wealth.

The analyst noted the soaring housing prices and difficulty collecting enough money to buy a home through bank savings is especially leading people to look for other means.

Another analyst estimated installment savings accounts will not gain popularity, even if the BOK raises the rate further in coming months. The central bank is scheduled to hold its next rate-setting meeting on Thursday.