Korean banks paying higher deposit rates to attract customers

Banners in front of a bank in Seoul show the floating-rate mortgage rates on Wednesday. [YONHAP]

Banks are fighting over deposits, paying rates to savers not seen in years.

As of Wednesday, one-year time deposit rates averaged 5.51 percent, according to the Korea Federation of Savings Banks. That's up from 2.37 percent at the beginning of the year.

Gyeonggi's Sangsangin Savings Bank is paying 6.10 percent for one-year time deposits.

“The rise of deposit rates means loan rates will also increase because it becomes more difficult for savings banks to raise funds,” said Lee Jeong-hwan, an associate professor at College of Economics and Finance at Hanyang University. “This will make it more difficult for the financially vulnerable to borrow.”

As the competition grows fierce, the Financial Supervisory Service (FSS) announced last month a temporarily easing of regulations on savings bank loan-to-deposit ratio requirements to 110 percent for six months from the previous 100 percent.

The goal is to facilitate borrowing.

Local banks are also feeling the pressure to up the rate to maintain customers.

“We’re working on offering special financial products because banks are currently competing fiercely to attract customers,” said Yang Hyun-jun, a PR team leader at Kwangju Bank.

The highest rate currently offered by Kwangju Bank for deposits is 4.60 percent.

The amount that flowed into banks for new installment savings and deposits in September grew 30.5 trillion won ($23 billion) from a month earlier, Bank of Korea data indicated Tuesday. It was the second largest increase since the data were first compiled in 2001.

The Cost of Fund Index (Cofix), which is the reference rate for variable-rate mortgages, climbed to 3.98 percent for new loans issued in October, up 0.58 percentage points from a month earlier, according to the Korea Federation of Banks Tuesday.

The upper rate for KB Kookmin Bank’s variable rate mortgages jumped to 7.16 percent on Wednesday from 6.58 percent, while Woori Bank’s increased to 7.12 percent from 6.65 percent.

The central bank’s base interest rate jumped to 3.00 percent from 0.50 percent in July last year.

It still faces the task of lowering inflation to 2 percent from above 5 percent. The widening gap with the Federal Reserve’s federal funds rate is another concern.

The Fed pushed up the policy rate to the range of 3.75 percent to 4.00 percent earlier this month.

“The rate gap has widened and deepened difficulty for monetary policy decisions,” Suh Young-kyung, one of the central bank’s seven monetary policy board members, said at a forum in Seoul Tuesday.

The Bank of Korea is scheduled to hold a Monetary Policy Board meeting on Nov. 24.

BY JIN MIN-JI [jin.minji@joongang.co.kr]