Domestic banks are raising additional charges on loans to small and medium-sized enterprises (SMEs) and self-employed individuals despite the interest rate hike. As the arrears rate rapidly increases due to the effects of economic recession and reduced consumption, this reflects the risks incorporated into the additional charge. Raising the additional charge diminishes the effect of interest rate cuts, leading to criticisms that banks increase additional charges to protect their margins and engage in 'easy interest businesses.' The loan interest rate is calculated by adding the additional charge, which corresponds to the interest margin, to the base rate and then subtracting any preferential rates.
According to the bank federation on the 1st, the average additional charge for new small and medium-sized enterprise credit loans provided by KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup banks was 4.2% to 5.35% in July, up from 4.15% to 5.07% in April. The average additional charge for self-employed credit loans also recorded an increase from 3.92% to 5.04% in April to 3.95% to 5.22% in July.
By bank, Shinhan Bank had the largest increase in average additional charges for small and medium-sized enterprise credit loans over the past three months. The additional charge at Shinhan Bank rose from 4.95% in April to 5.23% in July, an increase of 0.4 percentage points. Meanwhile, other banks saw their additional charges rise slightly by 0.03 to 0.18 percentage points during the same period. Shinhan Bank also raised the additional charge for self-employed credit loans by the largest margin (0.33 percentage points). The highest rate for self-employed credit loan additional charges was at Woori Bank (5.22%).
The loan interest rate is ultimately determined by the market interest rate linked to the base rate, as well as the additional charge assessed by banks that factors in credit risk, capital costs, and expected profit margins. Despite the Bank of Korea having lowered the base rate by 0.5 percentage points in two instances in October and November last year, the lower end of average interest rates for small and medium-sized enterprise credit loans remained just 0.3 percentage points lower over the past year. Meanwhile, the upper end of the average interest rate for self-employed credit loans rose from the 5% range to the 6% range. This indicates that the additional charge has risen sufficiently to offset the reductions in the market interest rate.
The banking sector cites the high arrears rate as a reason for maintaining or continuously increasing additional charges for small and medium-sized enterprises and self-employed individuals. According to the Financial Supervisory Service, the corporate loan arrears rate (one month or more overdue) for domestic banks was 0.77% in May, the highest level since November 2018 (0.86%). The arrears rate for small and medium-sized enterprise loans rose to 0.95%, a jump of 0.12 percentage points within a month. The arrears rate for individual business loans also increased by 0.08 percentage points to 0.82% during the same period.
An official from the banking sector noted, 'The potential bad debts that accumulated after COVID-19 are bursting, especially among small and medium-sized enterprises and self-employed individuals, leading to a rapid increase in new arrears,' and added, 'There are aspects where the increase in additional charges is inevitable from the bank's perspective.'