[1mm Financial Talk] "What to Do About Loan-Deposit Interest Rate Spread Disclosure"…Why Internet Banks Are Nervous

‘Disclosure of Banks' Loan-Deposit Interest Rate Spread’ Accelerates, Internet Banks on Edge
Figures Suggest Internet Banks May Have Higher Loan-Deposit Spreads Than Commercial Banks

Structure Necessarily Leads to Higher Loan Rates Due to Focus on Medium-Low Credit Borrowers
"Worried About Criticism of Internet Banks Without Understanding the Full Context"

[Asia Economy Reporter Sim Nayoung] Internet banks are becoming anxious as the ‘disclosure of banks’ loan-deposit interest rate spread,’ a key financial pledge of President-elect Yoon Seok-yeol, gains momentum. The loan-deposit interest rate spread is the difference between deposit interest rates and loan interest rates and is a major source of revenue for banks. During the interest rate hike period starting in August last year, commercial banks raised loan interest rates more than deposit interest rates, achieving record-high profits. President-elect Yoon pledged to protect financial consumers by disclosing the loan-deposit interest rate spread, and the Presidential Transition Committee and the Financial Supervisory Service are considering a plan to disclose it once a month.

However, internet banks (hereafter In-banks) are more worried about the loan-deposit interest rate spread disclosure, which targets commercial banks. On the surface, the loan-deposit interest rate spread of In-banks may be larger than that of commercial banks. The main loan customers of KakaoBank (KaBank), K Bank (KBank), and Toss Bank (ToBank) are middle- and low-credit borrowers. One of the purposes of establishing In-banks is to prevent people with low credit scores from turning to private loan markets and to enable them to use the formal financial system. Loan interest rates are set by banks as a form of insurance against potential defaults, so the lower the credit rating, the higher the interest rate. This structure makes it inevitable that In-banks’ loan interest rates are higher than those of commercial banks.

Loan Interest Rates → KaBank 10.21%, KBank 6.03%, ToBank 6.23%
High proportion of middle- and low-credit borrowers leads to this situation... Loan interest rates likely to rise further this year

According to the February data on general unsecured loan interest rates in the household sector disclosed by the Korea Federation of Banks on the 22nd, KaBank’s rate was 10.21%, KBank’s 6.03%, and ToBank’s 6.23%. Compared to the five major commercial banks’ range of 3.77% to 4.21%, these are high rates. Loan interest rates at In-banks are expected to rise further. As of the end of last year, the proportion of unsecured loans to middle- and low-credit borrowers (those with credit scores in the lower 50%, 820 points or below) was 23.9% for ToBank, 17.0% for KaBank, and 16.6% for KBank. Each bank aims to increase these proportions to 42%, 25%, and 25%, respectively, by December this year, which will also push loan interest rates higher.

In particular, KaBank has not lent to high-credit borrowers since October last year, resulting in its loan interest rate last month being about 4 percentage points higher than those of KBank and ToBank. Following the Financial Services Commission’s guidelines at that time, KaBank managed the total household loan volume and blocked loans to high-credit borrowers to increase the proportion of loans to middle- and low-credit borrowers. This year, KaBank has no plans to lend to high-credit borrowers as it focuses on expanding mortgage loans, jeonse (key money deposit) loans, and corporate loans. The loan interest rate in the 10% range is expected to continue for the time being.

Deposit interest rates are also higher at In-banks but unlikely to affect loan-deposit interest rate spread comparison
There are other underlying reasons why the loan-deposit interest rate spread stands out

Deposit interest rates at In-banks are also higher than those of commercial banks but by less than 1 percentage point. This is unlikely to significantly affect comparisons of the loan-deposit interest rate spread with commercial banks. While the general deposit interest rate at commercial banks is in the high 1% range, In-banks offer rates in the low to mid 2% range. Since In-banks raise and manage loan funds by accepting deposits, an increase in deposits is necessary to increase loans. In-banks explain that their deposit interest rates need to be higher than those of commercial banks to facilitate raising loan funds, giving them somewhat of a competitive edge over commercial banks.

A senior official at an internet bank said, "Although deposit interest rates are higher than those of commercial banks, loan interest rates are even higher, so if the loan-deposit interest rate spread disclosure starts this year, internet banks will appear to have a much larger spread than commercial banks just by the numbers." He added, "Unlike commercial banks that lend mainly to high-credit borrowers, In-banks focus on lending to middle- and low-credit borrowers, which involves higher risk. We are worried that the political sphere might attack In-banks without considering these underlying circumstances."