.25 percentage point saves $112So how much will the policy rate cut by the central bank last week ease the loan-interest burden on individuals?
According to the Financial Supervisory Service yesterday, the 7.8 million people who have bank loans with adjustable interest rates will each pay an average of 114,000 won ($112) less a year.
The FSS said overall interest on household debt and corporate loans from banks will shrink by 1.8 trillion won annually after the Bank of Korea lowered the nation’s key interest rate from 2.5 percent to 2.25 percent during its monthly monetary policy committee meeting last Thursday.
It was the first policy rate change the central bank has made in 15 months, since lowering it from 2.75 percent to 2.5 percent in May 2013.
The cumulative value of loans with flexible interest rates at the end of March was 1,149 trillion won. Of that, 478.5 trillion won were borrowed by households, 171 trillion won by conglomerates and 499.5 trillion won by small and medium sized companies.
Adjustable rate loans accounted for 74.3 percent of total household debt, compared to 56.2 percent for all conglomerate debt and 57.5 percent for small and medium sized business debt.
The lower policy rate is expected to save companies an average of 955,000 won annually in interest. Nearly 8 million individuals and 1 million companies are expected to benefit from the rate cut. Because of the policy rate change, commercial banks are expected to see 270 billion won less income annually. That’s equivalent to 7 percent of the 3.9 trillion won that local banks reported last year.
The FSS noted the lower policy rate would improve profitability in the long run by reducing default and bankruptcy rates, and helping to lower the unemployment rate.
After the BOK lowered the policy rate last week, the FSS summoned 11 people in charge of loans at commercial banks, regional banks and special banks to ask that they reflect the policy rate change immediately.
“The lowering of the interest rate has to serve the purpose of leading the economy to revitalization,” said Kwon Chang-woo at the FSS Bank Supervision Department. “Therefore, we asked for full cooperation in easing the burden on borrowers.”
BY PARK YU-MI [firstname.lastname@example.org]
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