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By Lee Min-hyung
Commercial banks are being criticized for rushing to raise loan interest rates following the Bank of Korea's (BOK) base rate hike last month, while dragging their heels when it comes to increasing interest rates on deposits.
With the central bank sending repeated signals of putting a gradual end to super-low interest rates, customers are expected to pay more interest on their loans. As a result, commercial banks are being called downright greedy by some.
As of the end of July, Korean banks' deposit rates still remained below 1 percent. Their average deposit interest rate came in at 0.97 percent, up 0.03 percentage points from a month ago. In contrast, interest on household loans increased by 0.07 percentage points to 2.99 percent during the same period, according to data from the BOK.
Data also showed that the deposit interest rate edged up only 0.07 percentage points at the end of July compared to the end of 2020. But the household loan rate jumped by 0.2 percentage points during the same period.
Households are expected to be exposed to more interest-related risks in the latter half of this year when the central bank has signaled the strong chance of one more key rate hike. The BOK raised the key rate by 25 basis points in August for the first time since the COVID-19 pandemic erupted early last year.
Korean banks have long been criticized for relying too much on loan interest for profit without endeavoring to find new growth engines.
Industry officials said it is realistically hard for banks to reduce their reliance on the traditional profit source in a short period of time, as they need to survive amid intensifying competition from not just their conventional rivals, but also new fintech players.
"Financial groups keep pledging to increase their profitability in the non-banking sector, but it takes time until they can find a specific and sustainable profit source other than loans," a financial industry source said.
This is partly because banks keep evaluating and comparing their earnings performance with their rivals on a quarterly basis and no lender wants to fall behind by making risky investments in untapped areas, according to the source.
Their continuous penchant for loans will remain as a great burden on households in the foreseeable future, as the BOK is showing signs of pushing for a further rate hike as early as October or November to control the surging level of post-pandemic household debt.
The central bank is expected to continue hiking the key rate next year to over 1 percent under the scenario that economic concerns over the fourth wave of the pandemic subside and domestic consumption returns to a stable recovery track.
