As the Democratic Party of Korea decided to place a Banking Act amendment on the National Assembly plenary session agenda on the 15th to prevent banks from reflecting deposit insurance premiums and contributions to policy finance institutions in loan spreads, banks are mulling countermeasures.
In the financial sector, there are concerns that legally regulating loan spreads will raise the bar for loans to mid- and low-credit borrowers rather than lower interest rates. Banks are said to have asked the National Assembly to delete the penalty clause from the amendment.
According to the financial sector and the National Assembly on the 7th, the Banking Act amendment, spearheaded in Dec. last year by Democratic Party lawmaker Min Byung-deok, centers on preventing banks from reflecting deposit insurance premiums and contributions to the Korea Inclusive Finance Agency (KINFA) in loan spreads. Contributions to guarantee institutions such as the Korea Credit Guarantee Fund (KODIT) and the Korea Technology Finance Corporation (KOTEC) can be reflected in guaranteed loan spreads only up to 50% or less. The bill also includes a penalty clause imposing up to one year in prison or a fine of up to 30 million won on bank executives and others who violate it.
Typically, when calculating loan spreads, banks reflect deposit insurance premiums, statutory contributions, and taxes. Because these are essential expenses for the business, they are counted as loan costs. The financial sector expects that, if the amendment takes effect, the side effect will be higher hurdles for mid- and low-credit borrowers rather than a decline in interest rates.
If fixed expenses that banks pay are excluded from loan spreads, the net interest margin (NIM) will decrease accordingly. To improve NIM, banks are likely to reduce lending to mid- and low-credit borrowers and focus their lending business on prime borrowers (loan recipients).
Jeon Bae-seung, an analyst at LS Securities, said, "After the amendment is applied, banks' pre-tax profit is estimated to decrease by at least 5% to around 10% at most," and noted, "Unlike shared-growth finance, regulating loan spreads can act as a persistent margin pressure factor, so it needs to be monitored closely."
On the other hand, the prevailing view in the financial sector is that banks can make up profitability by trimming preferential rates and tightening loan screening, so the actual effect of lowering lending rates will be limited. The financial authorities and the banking sector conveyed the possibility of such side effects to the National Assembly, but the Democratic Party pushed ahead with handling the amendment.
The banking sector is said to have recently asked the National Assembly to remove the penalty clause from the amendment, calling it excessive. However, once the amendment is placed on the plenary session agenda on the 15th, the bill cannot be revised. Therefore, the banking sector says it is necessary to introduce a new Banking Act amendment that deletes the penalty clause. Still, this request has not yet been reflected in the amendment.
A commercial bank official said, "The Democratic Party has designated the Banking Act amendment for the fast-track, and it is being placed on the plenary session agenda without proper discussions at the National Policy Committee and the Legislation and Judiciary Committee," adding, "We conveyed the view that the penalty clause is excessive, but it is unclear whether that will be accepted."