The Growing Divide: Loan Rates vs. Deposit rates

As the Bank of Korea’s interest rate cut in February, a significant divergence has emerged between deposit and loan rates, raising concerns about the financial burden on consumers. The decline in deposit rates has outpaced the reduction in loan rates by a factor of three, leading to a widening interest rate gap that benefits banks but potentially disadvantages borrowers and savers.

This trend is particularly concerning given the current economic climate, where many individuals and families are already struggling with financial pressures. The widening gap exacerbates these challenges, potentially hindering economic recovery.

Quantifying the Discrepancy: A Look at the Numbers

An analysis of five major South Korean banks – KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup – reveals a concerning trend. the average interest rate difference across these institutions has surged to 1.47 percentage points. This represents a significant increase of 0.44 percentage points compared to the 1.03 percentage point difference observed just six months prior, in August of the previous year.

Breaking down the figures by bank:

• Woori bank saw the most significant increase, with the interest rate difference jumping from 0.77%p to 1.48%p, a rise of 0.71%p.
• Shinhan Bank’s interest rate difference increased by 0.56%p, moving from 0.89%p.
• Kookmin Bank experienced a 0.49%p increase, rising from 0.84%p to 1.33%p.
• Hana Bank’s interest rate difference also rose, increasing by 0.41%p from 1.24%p to 1.65%p.
• Nonghyup Bank saw a more modest increase of 0.03%p, moving from 1.4%p to 1.43%p.

This interest rate difference, calculated by subtracting the deposit rate from the household loan rate, directly impacts bank margins. As the gap widens,banks stand to gain increased profits,while borrowers face higher costs and savers receive lower returns.

the Root Cause: Base Rate Adjustments and Market Dynamics

The upward trend in the interest rate gap can be traced back to February of last year when the Bank of Korea lowered the base rate by 0.25%p, from 3% to 2.75%. As then, the deposit rate has decreased at roughly three times the rate of the loan rate, contributing to the widening disparity.

Such as, the lower end of mortgage rates at four major banks decreased by a mere 0.13%p over a two-month period, moving from a range of 4.205-5.93% to 4.07-5.59%. In contrast, deposit rates (based on the highest interest rate for 12-month maturity accounts) plummeted by 0.3-0.35%p during the same period, falling from 2.95-3% to 2.6-2.7%.

banks Respond: Blaming regulatory Pressure

Banks are facing increasing scrutiny over the expanding interest rate gaps.in response, some institutions are pointing to pressure from financial authorities to manage household loans. They argue that raising loan rates was an unavoidable measure to curb borrowing and manage household debt levels.

We are worried about the increase in household debt by significantly lowering the loan rate according to the base rate.

A commercial bank official

Though, this clarification has not quelled public criticism, with many questioning whether banks are prioritizing their own financial interests over the needs of their customers.

Looking Ahead: Political Influence and Potential Solutions

as the interest rate gaps continue to widen, criticisms of banks profiting from interest rate spreads are likely to persist. Some analysts suggest that the upcoming presidential election could lead to the implementation of win-win finance measures aimed at addressing the controversy and providing relief to consumers.

The early presidential elections are coming to the front of the nose, and we will come up with financial measures without any candidates.

Another bank official

With most sectors of the economy facing challenges, banks are expected to align with the policies and assistance programs proposed by presidential candidates. The coming months will be crucial in determining whether these measures can effectively address the widening interest rate gaps and restore public trust in the banking sector.