By Na Jeong-ju
Staff Reporter
Households will have to pay higher interest on non-fixed-rate loans as interest rates on certificates of deposit (CDs), the benchmark rate for such loans, are rising again, reflecting a surge in bond rates.
The CD rate rose by 0.09 percentage points over the past week as foreigners continued to sell stocks and bonds here, prompting a rise in bond rates and a steep fall in stock prices.
The rate soared to its highest level in six years and eight months at 5.89 percent on Jan. 10, but has since fallen to 5.17 percent on March 3. It is now going up again as foreign investors are reducing their exposure to riskier assets, bank officials say. As of March 19, the rate stood at 5.26 percent.
The rise in the CD rate adds an interest burden on loan borrowers and weakens their capability to service their debts.
Analysts expect the CD rate to continue to rise in the weeks to come, reflecting an exodus of foreign funds from emerging markets and global financial market volatility. The rise in CD rates may raise concerns here about a possible credit squeeze amid sluggish home prices and rising household debt.
``Households will have to shoulder greater interest burden at a time when prices of raw materials are rising and the Korean won is losing ground fast against major currencies,'' said Han Jae-joon, an economist at the Korea Institute of Finance (KIF). ``The situation may turn worse if the country fails to ease external negatives.''
Interest rates on variable-rate mortgages at Kookmin Bank, the country's largest lender, ranged from 5.87 to 7.47 percent as of March 19, up 0.06 percentage points from the end of last month. Other banks also raised lending rates in line with rises in CD rates.
According to the Bank of Korea, a 1 percentage point interest rise will increase total household interest costs by 2.6 trillion won a year.
BOK data shows more than 90 percent of bank loans are variable-rate, tied to the ups and downs of CD rates. In the face of dwindling consumer deposits, banks issued more bonds and CDs late last year to raise funds, prompting a sharp increase in borrowing rates.
The KIF said in a recent report that banks will need about 100 trillion won to cover maturing bonds and CDs in the first half of this year. Cash-hungry banks may move to issue more bonds and deposit-backed warrants to raise capital, causing a surge in interest rates and putting more borrowers in danger of default, the institute said.
``The rising interest burden on borrowers not only raises credit default risks for households and corporations, but also makes it more difficult for financial firms to raise the necessary funds for their businesses,'' the report said.