Headline: Despite two key interest rate cuts late last year, the interest rate gap between loans and deposits at Woori and NongHyup banks continues to widen, prompting financial authorities to pressure banks to make interest rate reductions more palpable for ordinary citizens. Woori and KB are set to lower rates by up to 0.29 percentage points this week. A loan service counter at a bank in Seoul on January 2, 2025. [Seoul=Newsis]
With signals from financial authorities and political circles that it is time for interest rates to be lowered, major banks have begun to reduce household loan rates. Since two cuts to the base interest rate last October, there has been ongoing criticism that ordinary citizens have not felt the benefits, forcing banks to respond to the pressure.
On the 26th, Woori Bank announced it would reduce the spread on its household loan products by up to 0.29 percentage points starting January 31. The rate for apartment mortgage loans (COFIX benchmark interest) will drop by 0.20 percentage points, leasehold loans by 0.01 to 0.29 percentage points, and personal loan rates by 0.23 percentage points. KB Kookmin Bank plans to lower its household loan rates (for 5-year financial bonds) by 0.04 percentage points starting January 27.
Bank loan rates consist of a benchmark rate reflecting market procurement rates, such as financial bonds or COFIX, and an additional spread added by individual banks. This spread includes operating costs, legal fees, risk premiums, and adjustment margins, primarily used by banks as a tool to control total loan volumes. Amid rising household debt, the banks have raised these spreads since the second half of last year (July–December).
Interest rate reduction movement began when Shinhan Bank decreased the spread on household loan products by up to 0.3 percentage points on January 13. SC First Bank joined by raising the preferential interest rate for its ‘First Home Loan’ by 0.1 percentage points, and IBK Industrial Bank of Korea increased the range of interest rate reductions that can be offered at branch manager discretion for face-to-face mortgage and lease loans starting on the 17th, by up to 0.4 percentage points depending on the product.
This adjustment by banks comes amid critiques that October and November’s base rate cuts by the Bank of Korea have not led to actual loan rate reductions. Data from the Bank’s Consumer Portal reveals that the interest rate gap (the difference between deposit and loan interest rates) at Woori Bank has been rising for five consecutive months since August last year (0.23 percentage points), and at NH NongHyup Bank for three consecutive months since October (1.2 percentage points). A financial sector insider explained, “A high interest rate gap means higher bank margins and less benefit passed on to consumers.”
There has been growing criticism that, despite high interest rate gaps, banks are likely to report record performances, seemingly fattening only the banks. This recently prompted financial authorities to call for interest rate reductions. On the 22nd, Financial Services Commission Chairman Kim Byung-hwan stated in a press briefing, “Despite two base interest rate cuts last year, the rate and range of spread reductions have not been sufficiently reflected,” adding, “I believe it’s time for banks to reflect the drop in the base rate in the new year.”
Although direct remarks on spreads were not made during a meeting on the 20th between Democratic Party leader Lee Jae-myung and the heads of six major banks, the meeting itself was interpreted by the financial sector as pressure for interest rate cuts. The Democratic Party is pushing for an amendment to the Banking Act to prevent passing on various insurance fees and contributions to borrowers through spreads.