Banks Wooing Businesses with Higher Interest Rates

A branch in Gangnam, an affluent area in Seoul, of Bank A was alarmed when a huge sum of money left the bank that had been suffering from a lack of deposits. A small business company withdrew 5 billion won out of 8 billion held in one-year corporate fixed deposits from the bank and put it into another bank for 0.2 percent higher interest. The bank begged and successfully redirected 3 billion won to it, but it is uneasy about similar cases happening again.

Since banks that are having a hard time have begun to woo businesses aggressively with high interest rates, businesses are shopping for better deals. The roles of banks and companies have reversed. Businesses now deposit their money after comparing the interest rates of different banks.

Companies have the money that they made from day-to-day sales and the money they got back from financial institutions when their deposit terms ended. Companies with good cash flow are sensitive to interest rates because they can make profits from short-term monetary management.

Yoon Joo-ho, a corporate customer department officer of Shinhan Bank, said, “Finance department employees are often assessed by their management results, and they often try to find a better interest rate by the end of year when personnel changes take place.”

Companies manage money in different ways, such as CDs, fixed deposits, Monetary Market Funds (MMF), and Monetary Market Deposit Account (MMDA), and the amount ranges from hundreds of million to tens of billion won, depending on the size of a company.

Kim Nak-geun, the management director of the corporate headquarters of Hana Bank said, “When the gap in the interest rates was not big, companies used to choose banks that they had been using or had a personal relationship with. Nowadays, they just move their money to the banks offering a higher interest rate. As companies negotiate interest rates by calling each bank, banks are beating each other’s rates.”

The notion of a “main bank” has long since disappeared-

A lack of money explains why banks are beginning to take steps to attract corporate customers. As money in bank deposits moves to CMA accounts or funds thanks to the bull market, banks are making up for the losses with CDs or bank bonds. As of the end of October, banks had a total of 790,359 billion won in loans and 579.944 billion won in deposits. The ratio of loans and deposits is as high as 136 percent.

For that reason, banks have to compete with each other to fill in their empty repositories offering higher interest rates. They are now begging companies for their business.

This competition causes higher interest rates, affecting borrowers negatively. After banks issued CDs recklessly, three-month bank CD rates rose by 0.91 percent from 4.86 percent at the end of last year to 5.77 percent as of December 18. Total bank CD funds reached 27.8 trillion won at the end of last month, 11.6 times more than last year’s 2.4 trillion won.

Han Jae-joon, a researcher of the Korea Institute of Finance, said, “A vicious cycle of lending at higher interest rates leading to borrowing at higher interest rates is taking place. Banks are excessively lending to borrowers and they are passing the buck to them.”

ssoo@donga.com kimsunmi@donga.com