Savings banks charge super high interest rates

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Savings banks charge super high interest rates

Savings banks are charging interest rates exceeding 20 percent - regardless of a borrowers’ credit ratings or their ability to repay loans.

As of May, 66.1 percent or 6.77 trillion won ($6 billion) in loans extended by 79 savings banks had interest rates of 20 percent or higher, according to a study by the Financial Supervisory Service (FSS) released Monday.

Those are loans extended to 851,000 borrowers.

The average interest rate was 25.6 percent and the average loan was 8 million won.

Savings banks, which in Korea are more like consumer finance companies, normally cater to low-income borrowers with poor credit ratings.

The average interest rate for all loans by savings banks - amounting to 10.2 trillion won - was 22.4 percent, 1.6 percentage points shy of the maximum interest rate allowed by law, which is 24 percent.

The bigger the institution, the higher the interest rate. More than 5.4 trillion won worth of loans extended by the top seven savings banks, or 73.6 percent, had interest rates of 20 percent or higher.

At OK Savings Bank, 90.9 percent of its 1.76 trillion won portfolio had interest rates of 20 percent or higher.

According to the FSS, the interest rate level on loans taken out by borrowers with mid-level credit ratings were not much different from those with lower credit ratings.

Borrowers with credit ratings between 4 and 6 - on a scale of one to 10, with one being the best - accounted for 66.7 percent of all borrowers. However, the average interest rate charged borrowers with credit scores of six, which were the largest group at 36.8 percent of the total, was 23.4 percent. Borrowers with a credit score of seven, which accounted for 16.8 percent of the total, were charged an interest rate of 25.3 percent. The bottom three credit scores were charged an average of 25.2 percent.

Thanks to the high interest rates, savings banks were more profitable than commercial banks. The spread between profits on loans and interest paid on deposits was 6.8 percent for savings banks compared to 1.7 percent for commercial banks.

The spread for the top 20 savings banks was even higher at 8.3 percent.

The return-on-assets (ROA) for savings banks averaged 1.4 percent, double the 0.7 percent for commercial banks. Return-on-equity (ROE) for savings banks averaged 12.5 percent, compared to the commercial banks’ 9.6 percent.

Welcome Savings Bank’s ROA was 2.7 percent while its ROE was 33.3 percent. SBI Savings Bank’s ROA was 2.8 percent and its ROE was 27.6 percent.

While savings banks claim they charge higher interest rates because they take more risk lending to people with poor credit, the financial authority says their interest rates are too high.

Household debt is a potential problem for Korea as overall debt including credit card purchases has been breaking records, and the Korean central bank is under pressure to raise interest rates. In the last monetary policy meeting of the BOK, one of the members on the committee was in favor of raising the key interest rate. If that happens, most loans will be more expensive to service, especially for people already paying high interest rates.

“In protecting the lower income households and those who are vulnerable, we plan on regularly disclosing related information in order to actively lead in the establishment of reasonable interest rate policies [at financial institutions],” said Kim Tae-kyung, head of the FSS non-bank supervision.

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