Flight from yields on time deposits

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Flight from yields on time deposits

With interest rates dipping as low as 2-something percent, savers have lost their appetites for time deposits, which were once Korean’s most basic financial product, according to market observers yesterday.

Market watchers say that after the economic slowdown and the interest rate cuts by the Bank of Korea, the landscape for banking habits has been changed and more people favor accumulative deposits in which money is added to an account every month for a certain period of time for which the interest rate hovers above 4 percent.

This trend is shown in statistics by Korea’s four major banks - KB Kookmin Bank, Woori Bank, Shinhan Bank and Hana Bank.

The balance for accumulative deposits at four banks stood at 28.2 trillion won ($26.1 billion) in November, up 2.47 percent from 27.5 trillion won in October.

The balance for time deposits slipped to 367.4 trillion won in November, down 0.25 percent from 368.3 trillion won in October.

In December 2011, the balance for accumulative deposits was only 23.1 trillion won.

Previously, people preferred time deposits. But after the central bank cut key interest rates twice this year, this has brought yield on time deposits near to zero.

According to the Bank of Korea, the average interest rate for a newly opened time deposit in October was 3.08 percent, lower than the 3.47 percent for accumulative deposits. The 0.39 percentage point gap is the biggest gap between the two financial products since December 2010, when the gap was 0.4 percentage point.

“The gap between the two products has been widening given that as early as January the average interest rate for a time deposit was 3.76 percent, 0.01 percentage point higher than the average rate for an accumulative deposit, which was 3.75 percent,” said an official at the Bank of Korea.

“Although interest rates for time deposits, as low as 2-something percent, aren’t as bad as in other developed countries including Japan, Koreans still feel the 2-something percent rate is an ultra-low rate,” said an employee at a bank. “The central bank is likely to cut the key rate again next year and this would again spur people to migrate to accumulative deposits from time deposits.”

Many people use accumulative deposits to keep money between two and three years while time deposits are often one-year contracts. Generally, the longer the term the better the yield.

By Kim Mi-ju [mijukim@joongang.co.kr]
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