Where Can You Find 3% Deposits? Financial Institutions Gaining Attention Amid Falling Interest Rates [Practical Investment]

Major Banks Lower Deposit Rates to 2% Range After Base Rate Cut
Special 3% Deposit Products from Savings Banks and Mutual Finance Institutions Draw Attention
Competition Heats Up to Attract Customers Ahead of September's Deposit Insurance Limit Increase to 100 Million Won

#Kim Jungseon (pseudonym), a 40-something office worker who has made "principal protection" the golden rule of financial management and has focused on bank savings and time deposits, is now facing a dilemma as banks have recently lowered deposit interest rates to the 2% range. With most time deposits now offering rates in the 2% range, it has become nearly impossible to design a financial strategy relying solely on bank deposits. However, as savings banks have begun offering time deposits in the 3% range, his interest has grown. Concerns about savings banks have also eased somewhat, as the government will raise the deposit insurance limit from 50 million won to 100 million won starting in September.

As the base interest rate has been lowered, bank deposit rates have continued to fall, deepening the concerns of people who have relied on bank deposits as their primary financial strategy. According to the Korea Federation of Banks, the average interest rate for one-year time deposits at commercial banks remains in the low-to-mid 2% range. After the Bank of Korea lowered the base rate to 2.5%, banks quickly reduced their time deposit rates. As deposit rates fall below the inflation rate, people are increasingly worried that keeping money in banks could actually result in a loss.

While overall deposit rates are declining, the so-called "second-tier" financial institutions, such as savings banks and mutual finance companies, are drawing attention by raising their deposit rates. This is seen as a move to defend against a decline in deposit balances caused by falling interest rates. It is also a strategy to attract more customers ahead of the increase in the deposit insurance limit set to take effect in September.

Savings banks' 3% time deposits draw attention as rates fall

According to the Korea Federation of Savings Banks on July 23, the average interest rate for one-year time deposits at domestic savings banks stood at 3.01% as of the previous day. After dropping to 2% in March, the average rate for time deposits has rebounded to 3% in just about four months.

Despite the Bank of Korea's base rate cut, savings banks have raised deposit rates as a measure to prevent customer outflows. According to the Bank of Korea, as of April, the total deposit balance at domestic savings banks was 98.3941 trillion won, the lowest level since October 2021. As interest rates fell, deposit customers withdrew their funds, leading to a decline in deposits for six consecutive months since November last year. The one-year time deposit rate at savings banks dropped to 2.98% per annum as of April 1, and further fell to 2.96% per annum in May.

As deposits continued to decrease, savings banks have been raising deposit rates and introducing special high-interest products since May in an effort to recover deposit balances. According to the consumer portal of the Korea Federation of Savings Banks, as of this day, Cheongju Savings Bank's main branch and Cheonan branch offer one-year time deposits at a rate of 3.40%. The rate at Yegaram Savings Bank is 3.3%, while OSB, The K, Smart, and DH Savings Banks offer 3.25%.

Special promotional savings and deposit products are also being launched one after another. KB Savings Bank began selling its "Pangpang Savings" product, which offers a maximum interest rate of 6.0% per annum, to 10,000 individuals (one account per person) starting on the 18th. The subscription period is 12 months, with monthly deposits ranging from a minimum of 10,000 won to a maximum of 300,000 won. The product features a base rate of 3% per annum, and with preferential rates applied, customers can enjoy a maximum rate of 6% per annum (for 12 months).

Welcome Savings Bank started selling its "First Transaction Preferential Installment Savings" product for first-time customers on the 21st, offering a maximum rate of 10% per annum for 30,000 special accounts. Accuon Savings Bank launched its "Plus Rotating (6M) Time Deposit" on the 14th, offering a maximum rate of 3.25% per annum. This product features a rotating structure, with the interest rate reset every six months.

SBI Savings Bank's "Cider Bank Free Savings," launched at the end of last month, saw its 30 billion won limit fully subscribed in less than a day. The product offers a base rate of 2.85% per annum, with an additional preferential rate of 1 percentage point, for a maximum rate of 3.85% per annum. The monthly deposit limit is a generous 3 million won, which attracted significant interest.

Mutual finance institutions are also attracting customers with high-interest deposit products. At major Saemaeul Geumgo and credit unions nationwide, it is not difficult to find time deposits and installment savings in the 3% range.

Competition to attract customers ahead of September's deposit insurance limit increase to 100 million won

The reason why second-tier financial institutions are aggressively offering high interest rates to attract customers is also due to the upcoming increase in the deposit insurance limit to be implemented in September. Starting September 1, the deposit insurance limit will be raised from the current 50 million won to 100 million won. This increase will apply not only to banks and savings banks protected by the Korea Deposit Insurance Corporation but also to mutual finance institutions whose deposits are protected by their respective central associations.

The market expects that the increase in the deposit insurance limit will trigger a "money move"?the migration of funds?to second-tier financial institutions such as mutual finance companies and savings banks, which offer higher interest rates than first-tier banks. Some interpret the current rise in deposit rates as a strategy to stagger maturity dates in anticipation of a temporary influx of funds after September.

However, some are concerned that the increase in the deposit insurance limit could lead to overheated competition among second-tier financial institutions offering high-interest promotional products. In response, the government is monitoring the preparedness of mutual finance institutions for the higher deposit insurance limit. In particular, there are concerns about potential side effects from excessive competition, as the delinquency rate on loans at savings banks, which was 3.41% at the end of 2022, soared to the 9% range as of the end of March this year, indicating a deterioration in asset quality.

Financial authorities are encouraging mutual finance companies and savings banks to actively clean up non-performing assets and have strengthened their oversight. In the second half of the year, mutual finance companies and savings banks are taking active steps to address bad assets, including establishing their own non-performing loan (NPL) management subsidiaries at the central association level.