[1mm Finance Talk] Banks Struggle Under Regulatory Pressure... The Dilemma of Narrowing the Lending-Deposit Spread

Limited Room for Rate Cuts as Banks Face Dilemma
Tighter Household Loan Controls Restrict Mortgage Rate Reductions
Financial Authorities Criticize "Interest Rate Profiteering" Amid Persistent Lending-Deposit Rate Gap
Banks Struggle to Lower

Banks, which have so far aligned themselves with the government's household loan management policy, have found themselves in a dilemma. This is because financial authorities have now strongly demanded measures to address the widening gap between lending and deposit rates (the difference between loan interest rates and deposit interest rates).

Commercial banks have promptly introduced follow-up measures such as lowering interest rates on loans for low-income borrowers. However, they remain reluctant to adjust the additional interest rates on mortgage loans, which are the main factor behind the widening gap between lending and deposit rates. Lowering mortgage rates could lead to a surge in loan demand, potentially conflicting with the government’s policy of controlling the total volume of household loans. Banks are now faced with the difficult task of curbing the growth of household loans while also reducing the burden on borrowers.

According to the financial sector on September 7, banks have recently been competing to introduce measures to reduce borrowers’ interest burdens. Specifically, Shinhan Bank and KB Kookmin Bank have lowered the annual interest rates on their “Saehimang Holssi Loan,” a loan product for low-income borrowers, by 0.8 to 1.0 percentage points. They have also introduced measures to expand the channels for non-face-to-face applications and to activate the right to request interest rate reductions. Lowering early repayment fees is also under consideration. Internet banks such as KakaoBank and K Bank have reduced household loan interest rates by 0.30 to 0.33 percentage points.

The reason banks have suddenly focused on reducing interest rates is to respond to criticism from financial authorities that “the gap between lending and deposit rates remains high despite a cut in the base rate.” Kwon Daeyoung, Vice Chairman of the Financial Services Commission, recently stated, “We cannot ignore criticism that banks alone are enjoying high profitability based on the lending-deposit margin, especially as the economic recovery is delayed and difficulties for vulnerable groups are intensifying,” urging banks to actively come up with countermeasures.

While banks are doing their best to comply with the authorities’ guidelines, they continue to express difficulties in reducing the gap between lending and deposit rates. This is because the recent widening of the gap is essentially the result of banks following the government’s strengthened household loan management policy. As a result, even after the base rate was cut, banks have been reluctant to lower mortgage loan rates.

According to the Bank of Korea, the interest rate on time deposits, including deposit interest rates (based on new transactions), fell by 0.72 percentage points from 3.22% at the end of last year to 2.50% in July this year. In contrast, the mortgage loan interest rate dropped by only 0.29 percentage points (from 4.25% to 3.96%). This is also in contrast to corporate loans, which dropped by 0.58 percentage points, and credit loans, which fell by 0.81 percentage points over the same period.

Ultimately, in order to narrow the gap between lending and deposit rates, mortgage loan rates need to be normalized. However, due to the total household loan volume regulations, banks find it difficult to easily lower the additional interest rates. Artificially raising deposit rates is also burdensome as it could lead to higher lending rates. Furthermore, after the government’s household loan regulations took effect on June 27, the total amount banks can lend has been further reduced, prompting some banks to actually raise the additional interest rates to strengthen their volume control. This is why there are concerns that mortgage loan rates may rise in the second half of the year.

An official from the banking sector said, “For now, we are managing the gap between lending and deposit rates by focusing on reducing the interest burden for vulnerable groups and lowering corporate loan rates. To truly feel a reduction in the lending-deposit rate gap, additional policy measures are needed so that mortgage rates can be lowered without concerns about a surge in loan demand.”