BOK report highlights need for higher proportion of fixed rate loans to ease debt burden

Customers visit a bank branch in Seoul. Yonhap

Spreads between local banks’ deposit and lending rates have widened recently in part due to their high proportion of floating rate loans, whose interest payments have risen sharply due to the ongoing monetary tightening, it said. Tuesday a report from the central bank.

The report compiled by the Bank of Korea (BOK) highlighted the need to explore ways to expand the use of fixed-rate programs to help ease the financial burden on households amid sharp increases in the benchmark rate and a resulting increase in borrowing costs.

“About 70% of loans are based on variable rate programs, which means that loan rates react sensitively to market rates, while about 55% of savings are demand and other types deposits that result in low costs and are less responsive to market rates,” the report states.

“As a result, lending rates have risen more sharply than deposit rates compared to previous periods of rising interest rate trends,” the report adds. “Expanding fixed-rate programs isn’t always desirable, but at least in times of large rate increases, we need to consider ways to do that.”

Banks have raised their lending rates significantly in line with the BOK’s aggressive increases in borrowing costs over the past year to rein in inflation. Critics suspect they have raised loan rates faster than savings rates in a way that allows them to profit more at the expense of customers.

The BOK has raised its benchmark interest rate by a combined 2.5 percentage points since August last year to fight inflation. It is expected to deliver further rate hikes down the road amid concerns over persistent high inflationary pressure.

The report also underlined the importance of strengthening competition among banks, as reduced competition could lead to widening spreads between loan and deposit rates and increase the financial burden on households. (Yonhap)