🚨 Bank Loan Interest Rate Reduction Demands
Today Korean Economic News | 2025.01.25
📌 "It's Time to Lower Loan Interest Rates"... Banks Criticized for Interest Profit-Making
💬 Concerns have been raised that it's time for banks to lower their loan interest rates. While some banks are taking measures to lower their spreads, opinions are emerging that household debt should be managed within the range of nominal growth rate increases, and that DSR regulations should be strengthened to establish lending practices that match borrowers' repayment abilities.
1️⃣ Simple Explanation
The news is that banks are being criticized for not sufficiently lowering their loan interest rates. Let me explain what this means and how it affects our daily lives.
Loan interest rates consist of two main parts. One is the 'base rate' set by the Bank of Korea, and the other is the 'spread' set by the banks themselves. Simply put, the base rate can be viewed as the 'cost', while the spread is similar to the bank's 'profit'.
Recently, as the economy has not been doing well, the Bank of Korea has been trending toward lowering the base rate. However, the core of the criticism is that banks are either maintaining their spreads or not lowering them sufficiently. This is similar to keeping product prices the same even when raw material costs decrease.
For example, let's assume you're repaying a 300 million won mortgage over 30 years. Just a 0.5 percentage point difference in the loan interest rate can result in about a 30 million won difference in the total repayment amount. This can be a significant burden for many households.
The government and consumer groups are criticizing banks for being reluctant to lower interest rates while making excessively high profits. Banks, on the other hand, argue that a cautious approach is necessary for management stability and risk management. The outcome of this debate will directly impact all of our household economies.
2️⃣ Economic Terms
📕 Loan Interest Rate
Loan interest rates are the rates applied by financial institutions when providing loans, consisting of the base rate and the spread.
- Different rate structures apply to different types of loans, such as mortgages, personal credit loans, and corporate loans.
- Variable rates change according to market conditions, while fixed rates remain the same throughout the loan period.
📕 Spread
The spread is an additional rate charged by banks beyond the base rate.
- It is determined by considering the bank's funding costs, operating costs, risk premiums, target returns, etc.
- It can be applied differently depending on the customer's creditworthiness, collateral value, loan period, product characteristics, etc.
📕 Debt Service Ratio (DSR)
Debt Service Ratio (DSR) refers to the proportion of principal and interest repayments for all loans relative to annual income.
- It is an indicator that comprehensively evaluates the repayment burden of all debts, including not only mortgages but also credit loans, card loans, etc.
- Individual DSR regulations are currently in effect, serving to encourage loans appropriate to the borrower's repayment ability.
📕 Nominal Growth Rate
Nominal growth rate refers to the growth rate of nominal GDP, including inflation.
- While the real growth rate measures actual economic growth excluding inflation, the nominal growth rate includes inflation.
- Managing household debt growth rates within the range of the nominal growth rate means ensuring that debt increases in proportion to the size of the economy.
3️⃣ Principles and Economic Outlook
💡 Bank Loan Interest Rate Determination Structure and Issues
Bank loan interest rates are determined by considering complex factors, and the core of the current controversy lies in banks' spread policies.
First, it's necessary to understand the basic structure of loan interest rates. Generally, loan interest rates consist of 'base rate + spread'. The base rate is based on the policy rate determined by the Bank of Korea or market-formed rates (CD rates, COFIX, etc.), while the spread is determined by the bank itself.
Second, there are factors that influence spread determination. The bank's funding costs, loan product risks, operating costs, target returns, market competition conditions, regulatory environment, etc. are comprehensively considered. Banks can adjust their spreads according to changes in these factors.
Third, the current controversy is that spread reductions are slower compared to the rate of base rate decreases. Despite the Bank of Korea's trend of lowering the base rate, criticism has been raised that banks are maintaining relatively high spreads, limiting the extent of loan interest rate decreases.
Fourth, banks cite risk management in an uncertain economic environment, maintaining net interest margins (the difference between deposit and loan rates) to secure profitability, and maintaining capital adequacy as reasons for maintaining spreads.
From this structural perspective, the interest rate reduction debate can be seen as a process of finding a balance between financial system stability and fairness, and economic revitalization, rather than simply a matter of numbers.
💡 Household Debt Management and the Impact of Interest Rate Policy
Interest rate policy has a significant impact on both the scale and qualitative aspects of household debt. The current proposals to 'manage household debt within the range of nominal growth rates' and 'strengthen DSR regulations' can be understood in this context.
First, there is a close relationship between interest rates and household debt scale. Generally, when interest rates decrease, borrowing costs decrease, leading to a tendency for household debt to increase. On the other hand, high interest rates have the effect of suppressing loan demand. Therefore, interest rate policy becomes an important means of controlling the total amount of household debt.
Second, managing household debt within the range of nominal growth rates is an approach that increases debt sustainability by ensuring that debt increases in line with economic growth. The concept is that if the economy grows by 3%, household debt should also be managed to increase within 3%.
Third, strengthening DSR regulations is a qualitative management method that focuses on the borrower's actual repayment ability. Rather than simply limiting the total amount of debt, it is an approach that reduces the risk of default by encouraging each borrower to receive loans appropriate to their income level.
Fourth, the balance between these policies is important. Excessively low interest rates can promote excessive household debt growth, while too high interest rates can lead to economic activity contraction and increased repayment burdens for existing borrowers. Also, excessive regulation can limit access to funds for those with genuine needs, while deregulation can increase systemic risk.
Therefore, the optimal policy combination should be determined by comprehensively considering economic conditions, household financial soundness, real estate market trends, etc., and interest rate policy plays an important role in this comprehensive approach.
💡 Financial Consumer Protection and Financial System Stability
The debate over bank loan interest rates can ultimately be seen as a balance between financial consumer protection and financial system stability.
First, from a financial consumer perspective, appropriate interest rate levels and transparent interest rate determination processes are important. If banks pursue excessive profits or if the interest rate determination process is opaque, consumer interests may be violated. In particular, the phenomenon where the effects of base rate cuts are not sufficiently passed on to borrowers can be problematic from a financial consumer rights perspective.
Second, from a financial system stability perspective, maintaining appropriate profitability and soundness of banks is necessary. Banks play roles in protecting depositors, performing credit intermediation functions, and maintaining financial system stability, so a certain level of profitability and capital soundness must be guaranteed.
Third, from a macroeconomic perspective, interest rate policy functions as an economic regulator. Interest rate cuts have economic stimulus effects, but excessive cuts can cause side effects such as asset bubbles or debt increases. Conversely, excessively high interest rates can contract economic activity and increase the risk of default.
Fourth, one of the important goals of financial policy is to mitigate interest rate volatility and increase predictability. Since sharp interest rate fluctuations make it difficult for economic agents to plan and manage risks, gradual and predictable interest rate adjustments are desirable.
Considering these various aspects, interest rate policy should be understood not simply as a matter of high or low, but as a process of finding a balance between various economic goals and values. The current debate can be seen as part of a social discussion to find this balance point.
4️⃣ In Conclusion
Criticism of banks' delay in lowering loan interest rates raises fundamental questions about the role and responsibility of the financial system, the fairness of profit distribution between economic agents, and the balance between macroeconomic stability and growth, beyond a simple interest rate debate. In a situation where the Bank of Korea is lowering the base rate in response to economic slowdown, if banks' spread adjustments are slow, the problem arises that the effects of monetary policy are not sufficiently transmitted to the real economy.
From a financial consumer's perspective, lowering loan interest rates has the direct effect of easing household burdens. For example, for a household with a 300 million won mortgage, a 0.5 percentage point reduction in interest rates reduces the annual interest burden by about 1.5 million won. This can lead to increased consumption capacity and improved household financial stability.
From a bank's perspective, lowering interest rates is an important management decision that directly affects profitability. In particular, the net interest margin, which is the difference between deposit and loan rates, is a core source of income for banks, so lowering loan interest rates requires careful consideration. However, considering the social responsibility of banks and their role as financial intermediaries, there are also concerns that pursuing profits beyond an appropriate level is not desirable.
From a policy perspective, the harmony between interest rate policy and household debt management policy is important. A balance point needs to be found by strengthening qualitative management such as DSR regulations to prevent loan interest rate reductions from leading to excessive household debt increases, while ensuring that access to finance for those with genuine needs is not restricted. Additionally, there is a need to pursue a sustainable balance between economic growth and debt increases by managing the household debt growth rate within the range of nominal growth rates.
Financial consumers and policy authorities need to create a market environment where bank interest rate determination processes are more transparent and the effects of base rate changes are appropriately transmitted. Measures such as strengthening information disclosure on interest rate determination factors, activating interest rate comparison platforms, and strengthening obligations to explain financial products can be considered for this.
In conclusion, the loan interest rate reduction debate is an important social discussion for the fairness and efficiency of the financial system, and the stable growth of the entire economy, beyond the issue of short-term interest rate adjustments. Banks, financial consumers, and policy authorities should all approach this issue with a responsible attitude for the common goal of healthy development of the entire economy, beyond their respective interests.