Why NongHyup Bank Waives Early Repayment Fees

Main Cause of High Household Loan Growth Compared to Other Sectors
Intended to Secure Loan Capacity by Encouraging Early Repayment Among Customers

[Asia Economy Reporter Kim Jin-ho] NH Nonghyup Bank has attracted attention for being the first among major commercial banks to fully waive prepayment penalties. The move is interpreted as an effort to increase customers' early repayments and secure lending capacity, amid concerns over its relatively high household loan growth rate compared to other banks. As Nonghyup Bank takes the lead, it remains to be seen whether the decision to waive prepayment fees will spread across the commercial banking sector.

According to the financial sector on the 29th, Nonghyup Bank will eliminate all prepayment penalties for partial or full early repayment of household loans from next month 1st until the end of the year.

A prepayment penalty is a kind of 'penalty' fee imposed by banks when borrowers repay all or part of the loan principal before the maturity date after taking out a loan. The prepayment penalty rate in the banking sector is around 1.2?1.4%. Typically, the fee is waived only if the loan period exceeds three years; otherwise, a fee must be paid if the loan is repaid early.

An official from Nonghyup Bank explained, "This measure aims to resolve the inconvenience of customers who cannot repay loans early due to prepayment penalties even when they have extra funds, encouraging repayment and reducing the actual interest burden on loan customers." Nonghyup Bank estimates that a customer who took out a fixed-rate, 3-year maturity mortgage loan could save about 930,000 KRW in costs by repaying 100 million KRW one year after the loan was taken.

However, the primary reason behind Nonghyup Bank’s decision to be the first among commercial banks to fully waive prepayment penalties is believed to be its unusually high household loan growth rate compared to other banks, rather than simply easing customer burdens.

Currently, Nonghyup Bank is the only bank exceeding the growth rate target (5?6%) set by financial authorities at the beginning of the year. While other banks have growth rates around 4?5% as of the third quarter, Nonghyup Bank’s rate has surpassed 7%. The analysis suggests that by waiving prepayment penalties, the bank aims to increase early loan repayments and secure lending capacity for household loans by the end of the year.

This is because if existing borrowers repay their loans promptly, additional loans can be extended to real demand customers who need new loans. Through this, the ultimate goal of complying with the financial authorities’ household loan growth rate target is expected to be achieved.

However, other commercial banks, excluding Nonghyup Bank, have not yet shown any intention to join the prepayment penalty waiver initiative. It has been confirmed that none of the major commercial banks have even considered waiving prepayment penalties. In particular, there are no related measures at the level of the Korea Federation of Banks either. Banks are skeptical about bearing the fees that are only charged when customers violate the contract period, especially since their loan repayment situations are not as urgent as Nonghyup Bank’s.

An official from a commercial bank said, "Prepayment penalties are fees imposed minimally to cover cost losses when contracts are violated. Unconditionally waiving them is not desirable from a market logic perspective," he pointed out.