Commercial Banks React Sharply to the 'Interest Reduction System' Launched by BNK Financial Group

BNK Offers Reduced Default Interest if Normal Interest Paid Within 3 Months
Commercial Banks Say "Good Intention but Difficult to Implement"

BNK Financial Group announced on the 25th that it has implemented the 'Overdue Interest Reduction System,' the first of its kind in the financial sector.

[Asia Economy Reporter Song Seung-seop] City banks are experiencing unexpected distress over BNK Financial Group’s ‘delinquent interest reduction system,’ the first of its kind in the financial sector. As the grace period for principal and interest repayment on COVID-19 loans is extended again, there is concern that the financial authorities and political circles may impose additional burdens due to the bold support from regional banks. City banks, already dissatisfied with bills proposing principal and interest reductions on loans, are on high alert, fearing pressure to voluntarily implement similar systems.

According to the financial sector on the 26th, BNK Financial announced that through its affiliates Busan Bank and Gyeongnam Bank, it will implement a delinquent interest reduction system targeting local small and medium-sized enterprises that received COVID-19 loans.

The system works by reducing delinquent interest if the borrower pays the normal interest within three months of the delinquency. The scale of the delinquent interest reduction is estimated to be at least in the 2 billion KRW range. A Gyeongnam Bank official explained, "About 1 billion KRW is expected to be reduced," adding, "This is not an exact figure but a result calculated considering the current loan situation and delinquent interest rates." Busan Bank did not disclose specific figures, citing difficulty in calculating delinquent interest precisely, but considering it is larger than Gyeongnam Bank’s amount, it is estimated to exceed 1 billion KRW.

The delinquent interest reduction system is a measure rarely seen in the financial industry. Financial companies have provided various financial supports to vulnerable groups considering the COVID-19 situation. However, even in those cases, support was mostly limited to maturity extensions and preferential interest rates for new or refinancing loans. There has been no support measure in the form of waiving loan interest generated by private financial companies.

City Banks: "Good Intentions but Difficult to Implement"

Some speculate that the bold move by regional banks may elevate the interest reduction system as a financial support measure used by the government and political circles for pressure. Currently, major banks have been implementing loan maturity extensions and interest repayment deferrals for over a year under the direction of financial authorities. Political circles are intensifying pressure to limit interest or share profits as financial companies’ earnings rapidly increase. Financial companies, which must consider the government and ruling party’s stance, are expected to have no choice but to introduce interest reduction systems if prompted.

The financial sector holds the view that supporting delinquent interest through reductions is difficult. Since a significant portion of earnings must be devoted to strengthening soundness, not receiving interest, a source of revenue, could lead to deterioration in operating profits.

Concerns about fairness issues have also been raised. The difference between customers who pay interest on time and those who do not would disappear. A bank official said, "There are customers who pay normal interest diligently despite difficult circumstances," adding, "While it may be ‘good finance,’ if delinquent interest is not collected, fairness is compromised, inevitably causing dissatisfaction."

Another bank official said, "Delinquent interest on loans is fundamentally a penalty agreed upon by the bank and customers to encourage faithful repayment," adding, "The intention is good, but if many people abuse the reduction system, it could harm financial companies, making implementation difficult."