Savings banks enjoy profit on high loan interest rates

By Nam Hyun-woo

Savings banks have reaped their largest net interest income (NII) in four years, according to Korea’s top financial regulator, Wednesday, but criticism is arising that the gain heavily relies only on high loan interest rates.

According to data from the Financial Supervisory Service (FSS), the NII of 79 savings banks stood at 2.5 trillion won last year, up 24 percent from 2.02 trillion won in 2014. NII refers to the difference between revenue generated by interest-bearing assets and the cost of servicing liabilities.

The NII of savings banks had been on a steady decline since an illegal loan scandal involving several savings banks in 2012. However, the number jumped last year, apparently bolstered by the high margin between interest rates for loans and deposits.

Savings banks’ loan-deposit interest rate margin stood at 9.78 percent as of February, according to Bank of Korea (BOK) data, up 2.57 percentage points from 7.21 percent in 2014.

During the same period, deposit interest rates dropped to 2.12 percent from 2.86, along with the BOK’s key rate plunge to 1.5 percent from 2.5 percent. However, loan interest rates rose to 11.9 percent from 10.7 percent.

Savings banks say they raised loan interest rates because they extend more loans to customers with poor credit. According to the data, the share of loans with high interest rates out of overall loans accounted for more than half at most of savings banks.

Financial institutions here grade customers’ credit on a 10-scale system. Banks lend money to those graded 1 to 3 and the National Credit Union Federation of Korea and other similar institutions deal with customers on levels 4 to 5. Savings banks provide loans to those higher on the scale.

Savings banks say they have to raise loan interest rates because they are wary of delinquency as their customers often have poor credit ratings.

However, separate FSS data showed that the loan delinquency rate at savings banks stood at 9.3 percent at the end of 2015, less than half of the 20.2 percent in 2014.

Against this backdrop, calls are growing for ceilings to be placed on interest rates on loans at banks, credit unions and savings banks.