Higher Additional Interest Rate Increase for High Credit Borrowers
Banks Raise Thresholds for Low Credit Borrowers as Part of Risk Management
Banks are lowering loan interest rates by reducing the additional interest rate, but it has been found that the additional interest rate actually increased for low-credit borrowers. This is because their repayment ability is deteriorating due to the economic downturn. As a result, it has become more difficult for low-credit borrowers to borrow money from commercial banks.
Despite financial authorities' warnings to refrain from excessive high-interest lending practices, the interest rate spread between loans and deposits is widening compared to the previous month. On the 21st, citizens are conducting transactions at a branch of a major commercial bank in Seoul. Photo by Dongju Yoon doso7@
According to the Bankers Association disclosure on the 4th, the average additional interest rate on unsecured loans for borrowers with a credit score of 700 or below (based on KCB) at NH Nonghyup Bank last month was 5.57%, up 1.05 percentage points from 4.52% in November last year before the loan interest rate cuts began in earnest. Meanwhile, the average additional interest rate for borrowers with a credit score above 900 increased by 0.19 percentage points from 2.89% to 3.08% during the same period. Generally, borrowers with a KCB score of 700 or below are considered low-credit borrowers.
Woori Bank also saw the additional interest rate for low-credit borrowers rise by 0.62 percentage points from 5.22% in November last year to 5.84% last month, while the additional interest rate for high-credit borrowers increased only by 0.08 percentage points from 2.81% to 2.89%. KB Kookmin Bank and Shinhan Bank also experienced a higher increase in additional interest rates for low-credit borrowers compared to high-credit borrowers. In other words, borrowers with lower credit scores were charged higher additional interest rates.
The situation is no different for regional banks. At BNK Busan Bank, the average additional interest rate for low-credit borrowers rose from 5.9% in November last year to 7.54% in April this year, while for high-credit borrowers it actually decreased by 0.54 percentage points from 4.3% to 3.76%. At Jeonbuk Bank, the additional interest rate for low-credit borrowers increased by 1.79 percentage points (from 8.7% to 10.49%), whereas for high-credit borrowers it decreased by 0.71 percentage points (from 5.81% to 5.1%).
The reason why the additional interest rate increased more for low-credit borrowers is that their principal and interest repayment ability has worsened accordingly. Banks autonomously set the additional interest rate by adding labor costs, branch rental fees, and risk management costs. For vulnerable borrowers, the risk of principal loss is high, so banks apply higher additional interest rates.
The rise in additional interest rates has made bank loans more difficult for low-credit borrowers. In fact, the average credit score of borrowers using the five major commercial banks?KB Kookmin, Shinhan, Hana, Woori, and NH Nonghyup?rose by 13 points from 903 in November last year to 916. KB Kookmin Bank saw the largest increase of 37 points, from 907 to 941, followed by Shinhan Bank (13 points), Hana Bank (11 points), and Woori Bank (8 points). Nonghyup Bank’s average credit score decreased by 1 point from 897 to 896.
There are also opinions that policy finance should be further activated for low-credit borrowers facing higher loan hurdles. Kim Miru, a research fellow at the Korea Development Institute (KDI), explained, “Banks reducing loans to low-credit borrowers is necessary to prevent a systemic crisis,” but added, “It is desirable to respond by adjusting the total volume of policy finance according to economic conditions for vulnerable borrowers.”
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