[EDITORIALS]Banks Should Cut Their Loan Rates

Banks are slow to lower their loan rates even though market rates are low. The monetary authority has cut call rates twice since July in order to boost the sluggish economy, and commercial banks one after another slashed deposit rates. Rates of the most popular one-year fixed deposits have dropped by 3 to 6 percentage points in the past two months. The annual yield after taxes is down nearly to 4 percent. Considering the 4.7 percent increase in prices in the first half of the year, analysts say real rates have turned negative. In another words, an amount of money equivalent to the loss in purchasing power went from depositors to the banks.

Yet commercial banks are too passive in lowering loan rates. Banks cut their rates a bit for mortgage loans and credit loans case by case. But they do not lower the prime rate, the most significant standard for determining loan rates. Loans with floating rates, determined by adding a spread to the the prime rate, account more than 60 percent of all bank loans. The banks' annual prime rates vary from 9.25 percent to 10 percent, but no bank has adjusted the rate since January 1999.

Because banks lowered deposit rates but maintained loan rates, their performance has im-proved. Kookmin Bank and H&CB benefited greatly from the difference between deposit and loan rates to achieve record-breaking net profits.

Since commercial banks are enterprises, we cannot blame them for earning high profits. Banks emphasize that the net interest rate margin between loans and deposits in Korea is still smaller than that of other developed countries. But banks should not attempt to commandeer all the benefit of low market rates by maximizing their loan-deposit rate margin. Since banks lend almost 200 trillion won ($155 billion) to companies, taking 1 percentage point off the loan rate would create the same effect as investing 2 trillion won in business every year. In order to maintain the government's original intention in cutting call rates, we urge the commercial banks to consider slashing prime rates.