FSS and BOK to probe bank lending practices

Korea’s financial watchdog and central bank launched a joint inspection of major banks to check lending practices after some banks were found to have issued false notices about interest rates for their loans.

The Bank of Korea (BOK) and the Financial Supervisory Service said on Friday that they started the probe Tuesday on the country’s biggest lenders including Citibank and Standard Chartered Bank Korea as well as Shinhan Bank, KB Kookmin Bank, Woori Bank and KEB Hana Bank.

“The Bank of Korea requested that the Financial Supervisory Service look into the banks’ fiscal soundness and whether they comply with lending criteria,” a source from BOK’s bank examination division said.

The move reflects the central bank’s concern for the stubbornly high household debts faced with the trend of the rising interest rates. The BOK raised its benchmark interest rate to 1.5 percent from 1.25 percent in November. Major central banks including the U.S. Fed and European Central Bank will likely accelerate the pace of interest rate hikes this year against the backdrop of better than expected economic growth and global trade.

Despite the government’s efforts to contain mortgages, household debts show no sign of abating. Household debt including credit purchases surged to 1,450.9 trillion won ($1.3 trillion) at the end of December, up 8.1 percent from the previous year, according to the BOK on Thursday.

Along with the lending criteria, another focus is how local banks file the information needed to set mortgage interest rates.

“The inspection will be directed at checking the decision-making process in setting banks’ interest rates, internal rules related to the process and whether the process of determining the interest rates is properly set,” the Financial Supervisory Service said in a statement.

Market insiders see that the direction is in response to a false notice made by the banking federation and KEB Hana Bank in 2015, which translated into higher interest rates charged on mortgage borrowers.

The federation falsely quoted KEB Hana Bank’s Cost of Funds Index (Cofix) rate at 1.78 percent, higher than the actual rate of 1.77 percent.

The mistake resulted in 1.2 billion won ($1.1 million) in interest overcharges, according to an estimate released by the Financial Supervisory Service.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]