[Asia Economy Reporter Song Hwajeong] "No matter which bank you went to, the deposit interest rates were all the same. They only differed depending on whether it was a 1-year or 3-year term, but for the same product, the interest rates were identical. The same applied to loan interest rates; differences only existed based on credit rating and collateral, but otherwise, they were the same. The loan interest rates at mutual credit cooperatives (currently savings banks) were 1 percentage point higher than banks, and insurance company loan rates were 2 percentage points higher than banks, although insurance companies sometimes negotiated to adjust it to 1.5 percentage points higher."
A former financial official I recently met answered this way when asked about the situation before interest rate liberalization in 1991.
Interest rate liberalization was carried out in four stages, and counting from the implementation of the fourth stage in 1997, it has already been 25 years since full interest rate liberalization was enacted.
The reason for promoting interest rate liberalization at the time was partly due to the global trend of financial liberalization and capital mobility liberalization that began with the UK's financial Big Bang in the 1980s. Domestically, as the private market grew, there was a widespread recognition that the government's planned economy and controlled economy were no longer desirable for economic development. Additionally, during the economic development period from the 1960s to the 1980s, finance was used as a tool for export and industrial development, which delayed the inherent development of the financial industry, significantly weakening its competitiveness. The basic economic principle is that interest rates, as the 'price of money,' must function properly to activate market competition and enable genuine private-sector-led industrial and financial development.
The reason for bringing up old stories again is that even though 25 years have passed since interest rate liberalization, interest rates are still not truly free. The statutory maximum interest rate under the Loan Business Act was first introduced at 66% in October 2002, then lowered to 49% (2007), 44% (2010), 39% (2011), 34.9% (2014), 27.9% (2016), 24% (2018), and finally down to 20% last July. Although this was intended to protect low-income citizens suffering from high interest rates, the restriction on the statutory maximum interest rate has caused low-credit borrowers to be unable to obtain loans even from lending companies, pushing them into illegal private loans or loan shark markets. The number of loan business users has steadily decreased from 2,679,000 at the end of 2015 to about 1.23 million over six years.
As banks recently recorded record-breaking profits, the Yoon Seok-yeol presidential campaign proposed a policy to periodically disclose the interest rate spread between deposits and loans. There have even been calls in the market for banks to disclose their cost structures regarding interest rates. Regarding this, Lee Chang-yong, Governor of the Bank of Korea, gave a clear answer. At his confirmation hearing, he stated, "I support the disclosure of the interest rate spread itself, but detailed information such as costs, reasons, and target interest rates should be handled cautiously as they may be trade secrets." Governor Lee pointed out that if information by bank is disclosed and compared, unexpected side effects could occur, such as banks reducing differentiated financial services. He also warned that banks might reduce mid-interest-rate loans, which have relatively higher interest rates, to narrow the interest rate spread, thereby limiting financial accessibility for vulnerable groups such as low-income citizens.
It is certainly necessary to supervise whether interest rate calculations are done reasonably and transparently. However, one must not overlook that artificial interference against market principles can lead to distorted situations and inevitably cause other side effects. It is worth revisiting the original purpose of interest rate liberalization that began over 30 years ago.
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