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Banks frustrated at regulator's pressure to lower lending rates

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A teller's window at a local bank branch in Seoul / Yonhap
A teller's window at a local bank branch in Seoul / Yonhap
By Jhoo Dong-chan

Commercial banks are being frustrated by the financial regulators' moves to force them to lower their lending rates, bank officials said Sunday.

The Financial Services Commission (FSC) and Financial Supervisory Service (FSS) plan to announce new guidelines concerning how lending rates are set, making it more difficult for banks to raise interest rates.

But the lenders have been protesting the move, calling it excessive market intervention by the government.

In July, the FSC and FSS formed a joint taskforce to come up with measures to improve assessment systems for loan interest rates. This came after they found thousands of irregularities in banks' decisions on lending rates for individual customers.

When a customer applies for a loan, the banks determine how much an "additional interest rate" will be. The rate goes up for applicants with a lower income or collateral because these applicants are deemed to have a lower capacity to repay loans compared to people with a high income or valuable collateral.

The measures include the disclosure of the banks' calculating system to determine the additional interest rate.

However, banks claim the moves won't help lower rates because the system determines each individual customer's rate.

"There is not much room for the government's measure to direct a lender's assessment determining additional interest rates for each customer since it is calculated by the system," said a local commercial bank loan department worker.

"Generally, each bank's computerized system determines customers' credit rating and their loan rate. I don't think such disclosure would help lower their rates."

Another bank official said such government's efforts are an excessive market intervention.

"I believe it's just a little too much," the official was quoted as saying. "Lenders will be required to disclose each component of their loan calculating system in detail under the measures."

The regulators are also planning to shorten the posting cycle of the cost of funds index (COFIX) rate, which is currently announced every month. The COFIX rate is an actual commercial loan rate that is calculated based on the costs of funding information provided by eight domestic banks.

Lenders also protested the move, claiming it will only cause confusion among customers.

"Average loan rates will be lower when better credit-rating customer groups borrow money from banks under the measures," the official said.

"This could trigger a misunderstanding among ordinary customers that they are being discriminated against."

The FSC recently sent the draft to the Korea Federation of Banks as well as commercial banks. It plans to announce the measures this month.


Jhoo Dong-chan jhoo@koreatimes.co.kr


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