Banks under pressure to lower loan interest rate after president's remark

Economy

Published: 07 Nov. 2023, 19:05 Updated: 07 Nov. 2023, 19:16

Banks under pressure to lower loan interest rate after president's remark

A sign outside a bank in Seoul shows its loan interest rates. [YONHAP]

The banking sector is under pressure to lower loan interest rates for small businesses following President Yoon Suk Yeol’s comment about small and self-employed businesses being “slaves” to banks.

“Small and self-employed businesses, challenged by high interest rates, have to use all of their hard-earned money to repay the loan principal and interest, making it seem as if they are slaves to the banks,” said the president at a Cabinet meeting on Oct. 30.

Yet to achieve the desired effect, measures such as interest rate cuts need to be implemented, which would have the opposite effect of household loan suppression measures. Concerns on household debt and a need for regulation have also been rising as Korea’s household debt reaches a boiling point.

A belated warning about household debt

Yoon’s remarks have been perceived by the banking sector to mean that banks should stop self-serving themselves — as they have benefited from interest profit during the high interest rate period — and ease the suffering of ordinary citizens drowning in high interest rates. This is because all of the president’s comments on the economy were related to cases of citizens suffering from interest payments.

Interest profits gained by the banking sector are, in fact, increasing. The domestic banking sector’s profits from interest increased from 41.2 trillion won ($31.5 billion) in 2020 to 55.9 trillion won last year, according to the Financial Supervisory Service (FSS). In the first half of this year, banks made interest profits of 29.4 trillion won. At this rate, it is highly likely that this year’s profits will exceed last year’s amount.

The fastest way to reduce bank profits and ease the pressure of interest payment on ordinary citizens is to lower interest rates. Or to a similar effect, the government could fund more low-interest financial products for low-income brackets.

Yoon’s pressuring remarks to lower interest rates were met with skepticism and confusion by banking sector insiders.

“It seemed as if all-out efforts were being made to respond to household debt, so we don’t know how to respond to a request asking for a win-win situation,” said a worker at a commercial bank.

“There is a high possibility that lowering interest rates or increasing sales for low-interest rate financial products will lead to an increase in [people taking out] loans,” said a different source from the finance sector.

There are some views in the finance sector that season 2 of the “win-win financial trend” will unfold. Following President Yoon’s statement defining banks as “public goods” in February, banks and finance companies, under the leadership of FSS governor Lee Bok-hyun, have proposed win-win financial solutions in succession.

The Democratic Party of Korea argued that the “'win-win financial [trend] stamped with Lee Bok-hyun’s seal of approval’ contributed to the increase in household debt,” at the parliamentary inspection of the FSS on Oct. 17. Gov. Lee rebutted, saying that the “400 billion to 500 billion won provided by the banking sector cannot directly affect household loans.”

There are also some voices, especially in political circles, calling for a windfall tax on banks’ excessive profits.

“It seems unlikely that the introduction of a windfall tax, which is discussed mainly in politics, will be realized,” said Cho Joon-ki, researcher at SK Securities. “The government’s pressure on the banks could intensify again until early next year,” he added.

BY HA NAM-HYUN, KIM JU-YEON [kim.juyeon2@joongang.co.kr]