Concerns have been raised that the impact of the base rate cut is not being reflected in the interest rates on loans from commercial banks, leading the financial authorities to directly inspect the basis for banks' loan interest calculations. It appears that the financial authorities will particularly focus on examining the preferential interest rates determined at bank branches.
According to the financial sector on the 23rd, the Financial Supervisory Service (FSS) sent documents to 20 banks on the 21st, requesting the submission of data on the variations and basis of reference and additional charge interest rates by borrower and product, as well as the current status of preferential interest rates. The FSS plans to compile detailed data on changes in loan interest rates by bank to assess the rationality of the effects of the base rate cut on household loans.
This inspection appears to stem from concerns that despite the base rate cut by the Bank of Korea, loan interest rates have not decreased. Earlier, Lee Bok-hyeon, head of the Financial Supervisory Service, instructed at a financial situation review meeting last month to "carefully review the pathways for loan interest rate transmission and the trends in additional charges so that households and corporations can feel the impact of the previous two rate cuts."
The Bank of Korea lowered the base rate by 0.25 percentage points in October and November, bringing the base rate down from 3.5% to 3.0%. However, the loan interest rates of major commercial banks have actually risen. The banks determine their loan interest rates by adding the "additional charge" to the "indicator (reference) rate," which reflects market and financing interest rates such as bank bond rates and COFIX (Cost of Funds Index), and then adjusting it via decisions made by the bank headquarters or branch managers, thus deriving the "preferential interest rate (adjusted rate)".
Since the second half of last year, banks have continued to raise additional charges citing the need to suppress household loan demand under pressure from the financial authorities. Additionally, they have applied much lower reductions to the rates they would usually discount with preferential interest rates, thereby increasing the burden of loan interest rates.
Preferential interest rates refer to the rates that are reduced when customers have a salary account with the bank or use a bank credit card for a certain amount monthly. The FSS is expected to closely examine the application of preferential interest rates by banks. The FSS reports that banks have attempted to raise loan interest rates by reducing preferential interest rates by a factor of 2.8 to 6.1 times more than they have raised additional charges.
In fact, looking at the household loan interest rates based on new issuance published on the Consumer Portal of the Bank Association, the average household loan interest rates of the five major banks (KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup) rose uniformly in December of last year compared to September, before the rate cut.