Viable steps needed to protect borrowers from lending rate hikes
Consumers are reacting furiously to reports that commercial banks are widening their net interest margin while the financial authorities sit on their hands. The margin, which is the difference between the net interest income a bank generates from loans and the outgoing interest it pays to holders of savings accounts, widened from 2.05 percent at the end of last year to 2.14 percent in September, according to the Bank of Korea.
It is against this backdrop that a petition filed on the website of the presidential office demanding the government rein in the sharp rise in lending rates has drawn over 12,000 signatures less than a week after it was posted, Nov. 5.
This imbalance has been caused by a slower increase in deposit rates compared to a spike in lending rates fixed by banks. The annual fixed mortgage rates offered by the country's top four lenders had been between 2.92 percent and 4.42 percent in August. The figures are up almost a full percentage point as of last week. In contrast, the interest rate on one-year fixed deposits edged up just 0.15 percentage points. Banks deserve to be criticized for squeezing borrowers through their lending practices.
Distortions in the financial markets are so serious that market principles rarely work. Contrary to popular belief, interest rates on collateral-backed loans have become higher than those on unsecured loans; individuals with higher credit scores are often subject to higher lending rates than those with low scores.
This chaotic situation has been prompted by none other than the financial regulator. The financial authorities have every reason to tackle the country's deeply-entrenched household debt problem, but their headlong decision to tighten loans broadly in flagrant disregard of market principles has drawn the ire of borrowers. It is definitely abnormal that the nation's commercial banks earn nearly 40 trillion won ($33.8 billion) in combined net profit every year merely from the difference between deposit and lending rates. The regulator must take decisive action to prevent banks from continuing to prey on consumers in this manner.
Consumers are reacting furiously to reports that commercial banks are widening their net interest margin while the financial authorities sit on their hands. The margin, which is the difference between the net interest income a bank generates from loans and the outgoing interest it pays to holders of savings accounts, widened from 2.05 percent at the end of last year to 2.14 percent in September, according to the Bank of Korea.
It is against this backdrop that a petition filed on the website of the presidential office demanding the government rein in the sharp rise in lending rates has drawn over 12,000 signatures less than a week after it was posted, Nov. 5.
This imbalance has been caused by a slower increase in deposit rates compared to a spike in lending rates fixed by banks. The annual fixed mortgage rates offered by the country's top four lenders had been between 2.92 percent and 4.42 percent in August. The figures are up almost a full percentage point as of last week. In contrast, the interest rate on one-year fixed deposits edged up just 0.15 percentage points. Banks deserve to be criticized for squeezing borrowers through their lending practices.
Distortions in the financial markets are so serious that market principles rarely work. Contrary to popular belief, interest rates on collateral-backed loans have become higher than those on unsecured loans; individuals with higher credit scores are often subject to higher lending rates than those with low scores.
This chaotic situation has been prompted by none other than the financial regulator. The financial authorities have every reason to tackle the country's deeply-entrenched household debt problem, but their headlong decision to tighten loans broadly in flagrant disregard of market principles has drawn the ire of borrowers. It is definitely abnormal that the nation's commercial banks earn nearly 40 trillion won ($33.8 billion) in combined net profit every year merely from the difference between deposit and lending rates. The regulator must take decisive action to prevent banks from continuing to prey on consumers in this manner.
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