Why Are Banks Hesitating to 'Preemptively Lower' Early Repayment Fees? [1mm Financial Talk]

"Lowering Fees Will Lead to Loan Concentration"
Amid Authorities' Household Debt Management Policy
Commercial Banks Set to 'Implement Uniformly' on 13th
Procedures for Related System Development Underway

Banks are hesitant to proactively lower early repayment penalty rates in advance. Starting from the 13th of this month, due to a system reform, early repayment penalties on household loans in the banking sector are expected to be reduced by about half. While authorities are encouraging those prepared to implement the changes early, the financial sector is still cautiously watching each other.

According to financial authorities and the banking sector on the 3rd, major commercial banks are expected to uniformly apply the revised penalty rates starting on the 13th. A Financial Services Commission official said, "We will check if any bank can implement it a day or two earlier, but so far no one has stepped forward to do so."

On October 30 last year, Kim Byung-hwan, chairman of the Financial Services Commission, stated at a press conference, "Simulation results of the improvement in banks' early repayment penalty system show that fees could be reduced by about half compared to the current rates," adding, "Overall, the implementation will start from January next year, but some banks that are ready may implement it earlier." He expressed the same intention during the last National Assembly audit. This is based on the 'Amendment to the Financial Consumer Protection Supervision Regulations for Improving the Early Repayment Penalty Charging System,' which prohibits charging costs other than actual expenses such as opportunity costs due to fund operation disruption and administrative or recruitment costs related to loans. Banks will disclose the revised penalty rates to the Korea Federation of Banks on Friday the 10th and apply them starting Monday the 13th.

Major commercial banks implemented temporary waivers of penalties toward the end of last year. Shinhan, Woori, and IBK Industrial Bank of Korea waived penalties on all household loans (excluding fund loans) during November and extended the waiver through December. NH Nonghyup Bank also temporarily waived penalties on household loans for low-credit customers below a certain grade (BS grade 5) from March last year through February this year. Although publicly promoted as a 'win-win management' slogan in the financial sector, the dominant view is that the driving force was pressure from authorities to manage household debt. KB Kookmin Bank, which was judged to have managed household debt better than others, temporarily waived penalties only on mortgage loans for one month in September, while Hana Bank took no separate measures.

With the start of the new year, the total management volume of household loans by banks was reset, and early repayment penalty rates (excluding Nonghyup Bank) returned to previous levels. Banks appear reluctant to disclose and apply the revised penalty rates early, fearing that loan demand might concentrate on the banks that implement first. Due to the higher loan thresholds in the second half of last year, a 'balloon effect' occurred, with second-tier financial institutions recording the largest increase in household loans in 40 months in November last year. While authorities continue to manage the increase in household loans, they have decided to apply 'penalties' by reducing new loan volumes for banks that exceeded last year's loan targets. Moreover, as interest rates enter a declining phase and long-term 'money moves' are expected, early repayment penalties could become an important factor influencing borrowers' loan choices.

Before the reform of the penalty charging system, authorities reviewed simulation results from all financial sectors, including savings banks, mutual finance, insurance companies, and specialized credit finance companies, not just banks. Although the official stance is "banks that are ready can proceed," authorities have requested simulation results more than twice from banks, showing a cautious approach. Large differences in penalty rates between banks would be burdensome for both authorities and banks. In one case, a bank's simulation results differed by tens of basis points (1bp = 0.01 percentage points) from those of other banks. An official said, "In the early stages of the simulation process, there was confusion regarding the application period of past data and interest rate types, but through additional simulations, these differences were reduced."

Banks are expected to wait until the uniform implementation date while building related systems. A representative from a commercial bank said, "It is not just about the revised penalty rate figures being finalized; there are many accompanying procedures such as changing guidance letters, explanatory documents, and contracts for branch customers, as well as preparing all matters related to non-face-to-face loans and group loans." Another commercial bank official explained, "We have been working on system adjustments for the penalty reduction since the second half of last year. Even if technically early implementation is possible, there is no incentive to disclose first considering market conditions."