Rate Drop Boosts Trusts

As interest rates on bank deposits move lower, Korean depositors have become more interested in financial products of investment trust companies and investment banks, which are more risky but more profitable, sources in the financial sector said Wednesday.

While the average annual interest rate on bank savings deposits was 14.2 percent in 1997, the rate was 6.3 percent early this month and the rate after taxes and after discounting for inflation is only about 1 percent. According to the Bank of Korea, the rate dropped 1.75 percentage points from a year earlier, reducing gross national financial income by 9.4 trillion won ($7.5 billion).

According to market observers, the lower interest rates have especially hurt retirees, who depend more on income from interest. One 60-year old man who lives on interest and dividend income since he retired in 1996 placed 60 percent of his 250 million won lump sum retirement payment in a bank savings deposit and invested the remaining 100 million won in stocks offered by public subscription.

The man has earned 1 million won a month on average from interest on the bank deposit, but his monthly income recently declined to 600,000 won due to lower interest rates. Accordingly, he plans to invest in mutual funds operated by nonbank financial institutions, which are more risky but more profitable, after his time deposit expires next month.

According to the central bank, money entrusted to investment trust companies increased by 7.4 trillion won in January after declining 7.3 trillion won in December and 700 billion won in November.

Trust companies' money market funds attracted new investments worth 15.8 trillion won in January.

Merchant banks also attracted new deposits in January after several months of decline. "Inquiries about investment from retirees living on financial income have recently jumped," an official at Tong Yang Merchant Bank said.

by Moon So-young