Posted September. 17, 2003 23:10,
Former CEO of Mirae Corporation Jung Moon-sool, one of the first entrepreneurs, used private liabilities at high annual interest rate of 24 to 30% to promote his business. He says that he completely turned his back to the banks after borrowing their money a few times at the beginning. It is not because he was not credited. He felt that he would rather pay higher interest rates rather than being distressed by the banks. He says that, considering side costs, bank interest rates were not really that low either.
▷ One of the most representative misdeeds conducted by banks is compensating balance. Compensating balance refers to an act, which forces the borrowers to deposit a certain amount of the loan in the bank. Customers who do compensate balance are posed with double disadvantages. First, they are effectively left with a smaller amount to use. In addition, although the deposit interest rate is low, the loan rate is high, thus weighing the customers with substantial interest rate burden. During the times when compensating balance was prevalent, as much as 70% of the loan was frequently required to be deposited. There were even cases where bank employees used the interest of deposits for personal uses instead of returning them to the customers.
▷ Compensating balance was so prevalent due to the bureaucratic control of finance. Until mid-nineties, the government directly controlled interest rates for major loans in order to provide companies with cheap capital. Since the demand for money exceeded the supply, banks could not but be tempted by compensating balances. Fortunately, excessive compensating balance was moderated due to the liberalization of interest rates, and as demand for capital decreased recently, it is rapidly disappearing. However, as banks were permitted to sell insurance products from the beginning of this month, a new type of compensating balance is said to have appeared. As several banks forced the borrowers to sign contracts for certain insurances, quite a few complaints are filed, saying that they had no other choice but to be insured.
▷ The opening of the era of Bancassurance, which is a word that converges bank with assurance, has great significance for financial development. It could be seen as the first step to eliminate barriers, which are used to regulate the financial sector, between financial institutions. Customers are gladly anticipating that they would be receiving one-stop financial services, with the introduction of Bancassurance. However, if what they get is forceful insurance, it would be a cause for much disappointment. People may say that old times were better, should the new type of compensating balance be spread. Furthermore, should negative opinions prevail, financial liberalization may retreat. Banks must restrain from inflicting harm on themselves. The authorities that are responsible for supervision, must conduct strict inspections and punishments in order to keep bad practices at bay.
Chun Gwang-am iam@donga.com