The Financial Supervisory Service (FSS) is reviewing the basis for banks’ lending rate calculations, suspecting that banks are making profits by raising lending rates through methods such as increasing margins and reducing preferential rate discounts, even as the base interest rate has been lowered. The FSS sent official requests to 20 banks asking for data on rate changes and application of preferential rates.
Despite the Bank of Korea reducing the base interest rate by a total of 0.5 percentage points in late 2022, some major banks have been raising their lending rates. This was achieved by increasing the additional interest margin while reducing the preferential rate, which is typically offered to customers who meet certain conditions, like having a paycheck account with the bank or spending a certain amount on the bank’s credit card.
The data collected by the FSS will be used to determine whether the lowered base rate is effectively affecting household loan rates. Their focus is particularly on how banks apply preferential rates, as it was found that they imposed the rate increase by applying the preferential rates 2.8 to 6.1 times less.
In the latter half of last year, the average household loan rate for the five major banks increased by 0.38 to 1.0 percentage points despite the indicator rate falling by 0.39 to 0.53 percentage points. For instance, banks like KB Kookmin Bank, NH Nonghyup Bank, and Shinhan Bank raised their additional margins, while reducing the preferential rate discount.
The result of such practices was an increase in the spread between household loan rates and the deposit rates at the five major banks, further boosting their profit margins.