Kim Mo (45), who runs a restaurant in Yeongdeungpo-gu, Seoul, was recently surprised to receive a text about changes in loan interest rates. This is because the personal credit loan interest rate for business owners borrowed from banks has increased again. Although the Bank of Korea lowered the base interest rate consecutively in October and November, it was expected that loan interest rates would fall, but instead, they have continued to rise.
The Bank of Korea has lowered the base interest rate by 0.5 percentage points in two rounds, but loan interest rates are not easily lowering. Concerns among small business owners and self-employed individuals who expected their interest burden to decrease have been growing.
Since September, banks have been increasing the interest rates on new personal credit loans for business owners. While banks explain that it is difficult to lower interest rates due to high arrears rates, there are criticisms that they continue to engage in 'interest profiteering' despite pressures for cooperative finance.
According to the Korea Federation of Banks on the 31st, the average interest rate for personal credit loans (based on new transactions) from the five major banks, including KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup, was 5.73% last month, an increase of 0.07 percentage points from September (5.66%). Until September, prior to the Bank of Korea's interest rate cuts, the average interest rate was on a downward trend, but it began to rise in October.
Banks are repeatedly raising the additional charge. The average additional charge for personal credit loans among the five major banks has been rising monthly, increasing from 3.98% in June to 4.19% last month, a rise of 0.21 percentage points. The loan interest rate is calculated by adding the additional charge to the base interest rate (funding rate), whereas the additional charge can be adjusted by banks based on their management strategies.
Banks explain that the high arrears rate for personal loans necessitates adjustments to the additional charge for the sake of soundness management. A representative from a commercial bank said, "It is not that we are intentionally raising the rates only for personal loans; it is because the arrears rate continues to rise," adding, "The risk of default has increased, leading to a higher additional charge. The additional charge consists of business expenses (labor costs, processing costs, etc.), legal costs (grants to guarantee institutions, education tax, etc.), risk premiums, and target profit margins."
The situation regarding personal business loans is serious. According to the 'Status of Self-Employed Loans' data submitted to lawmakers Yang Bo-nam of the Democratic Party and Park Seong-hoon of the People Power Party by the Bank of Korea, the arrears rate for self-employed loans soared to 1.70% as of the end of the third quarter, the highest level in 9 years and 6 months since the first quarter of 2015 (2.05%).
In the political arena, there are calls for banks to disclose how they determine additional charges. The Democratic Party is pushing for a revision of the Banking Act to require banks to disclose the basis for calculating additional charges. A political figure noted, "Last week, banks announced financial support measures for borrowers (those who borrowed money) before going into arrears or closing down their businesses, but what is more urgent is the normalization of additional charges," adding, "Preventing fluctuations in additional charges and increasing predictability for borrowers is what self-employed individuals need most right now."