Banks argue new disclosure rules hurt more than help

A banner advertising interest rates on bank loans is hung in Jangan District in Suwon, Gyeonggi, on August 24. [NEWS1]

Banks are complaining that recent disclosure requirements can make them look bad when they are only doing good.

Since Aug. 22, they have been required to publish the difference between the average interest rate on loans and the average rate on deposits.

The aim is to keep interest rates down and make banks more competitive. It also helps the public better understand how these institutions are making money.

Many banks have been lowering loan rates even as the central bank increases rates, while some banks are still maintaining a big gap between deposit and loan rates, and the public and regulators are noticing.

The banks argue that the gaps are there for a good reason and more a sign of them helping the vulnerable than gouging.

Shinhan Bank, Toss Bank and Jeonbuk Bank said that the reason that they have a huge difference is because they have more clients with poor credit. Loans to these clients must be priced higher to compensate for the risk.

As of the end of last year, Shinhan Bank handled 975.1 billion won ($728.4 million) in loans to low-income borrowers, the most among the five largest commercial banks in Korea.

Jeonbuk Bank was the first in the business to provide unsecured loans to foreigners.

Toss Bank had the highest ratio among all banks of customers with medium to weak credit, at 38 percent as of the end of July.

Banks argue that ranking them by the loan-to-deposit interest rate gap could discourage them from taking bets on riskier customers. They could set relative low maximums for these customers or require them to apply in person rather than by computer.

Regulators don't consider the issue a problem and stress that more granular information is provided, such as loans by credit score.

Banks say phooey. No one reads the details of the statistics, they add.

Information about the acceptance of rate change requests from borrowers could also lead to unintended consequences, bankers argue.

Customers can make these requests when their circumstances change, such as when they get a raise.

From Aug. 30, information on these requests must be published every 6 months.

Bankers say that rejection of rate change requests could be a sign of more sophisticated credit management than a lack of service. They could look bad for no good reason.

The same issue was raised by a report from the National Assembly Research Service.

The report argued that too much focus on the acceptance rate could force financial companies to become less forthcoming with clients about their options when it comes to rate changes.

Lowering maximum interest rates has also come under fire.

In July 2021, the ceiling was taken from 27.9 percent to 20 percent.

This resulted in financial companies having to reject those with low credit scores.

According to analysis by the Korea Development Institute, some 659,000 people as of the end of 2021 who had unsecured loans from financial companies would be forced to borrow from private lenders, such as loan sharks, at higher rates every time the ceiling for banks is lowered 2 percentage points.

If the legal rate is lowered by 4 percentage points, about 1,084,000 people could be driven out from the banking market.

Legislators are pushing for bills that further lower the maximum legal rate.

Banks say the lawmakers should listen to them.

"In the case of disclosing loan-to-deposit interest rate gaps, it is necessary to improve the system by excluding loans targeted at those with low credit scores," said a bank official.

"It would be better to give incentives to financial companies that actively engage and guide customers through contact-free loan applications instead of disclosing the acceptance rate," a credit card issuer official said.

"The disclosure systems for the loan-to-deposit interest rate gap and acceptance rates on interest rate change requests are good policies in terms of upholding consumers' rights to know," said Ha Joon-kyung, professor of economics at Hanyang University. "However, market distortion is inevitable if the financial authorities try to place meaning and pressure on the disclosures instead of keeping the information objective."

BY KIM YEON-JOO [lim.jeongwon@joongang.co.kr]