Banks Raise Interest Rates on Loans En Masse

Financial institutions have raised lending rates en masse in the wake of the central bank’s hike of the benchmark interest rate, raising the interest burden on the people and small and mid-size companies.

Financial authorities announced a probe into high interest rates last week after President Lee Myung-bak complained of high interest charged by capital companies, making non-bank financial institutions reluctant to raise interest rate despite having good cause to do so.

Financial industry sources said Sunday that major commercial banks raised the rate on housing loans, which is set proportionally to the certificate of deposit rate, after the benchmark rate was increased a quarter of a percentage point July 9. Banks are also raising rates on credit loans.

Citibank Korea increased the annual rate on its credit loans to salaried workers 0.12 percentage points. Hana Bank also increased the rate on credit loans 0.20 percentage points last month and 0.12 percentage points this month.

Banks are also moving to raise rates on loans for small and medium-size banks as well. One bank increased the rate on loans to smaller companies 0.15 percentage points after the benchmark rate hike, and another raised the rate 0.02 percentage points as well.

With interest rates growing, borrowers are facing a mounting interest burden. Interest-bearing loans of households and companies reached 1,400 trillion won (117 billion U.S. dollars) in amount as of May. If the hike of 25 basis points in the benchmark rate is fully reflected in lending rates, households and companies must pay an estimated 3.5 trillion won (2.9 billion dollars) in additional interest.

Commercial banks have quickly raised lending rates, but capital companies are more cautious about doing so. A source at the Credit Finance Association said, “A hike in the benchmark rate increases financing costs, and secondary financial institutions have good reason to hike lending rates as well. Since financial authorities are trying to lower interest rates, however, they are at loss over what to do.”

Voices in the financial sector are growing over the need to create financial institutions that provide loans at 10-20 percent interest, a scope of rates between the under 10 percent charged by banks and 30-40 percent levied by capital companies and loan sharks.

cha@donga.com