Interest Liberalization

The interest on ordinary deposits, household current deposit accounts and other demand deposits, which had been held to an annual rate of one percent at the highest, will be liberalized starting next February.

From these arrangements, most of the interest will become liberalized, and as competition for credit becomes fierce, interest rates are forecasted to rise. Clients will have a more diversified variety of financial products to choose from.

Bank of Korea (BOK) announced yesterday at the Monetary Policy Committee the decision to completely liberalize the interest on demand deposits, including ordinary deposits, household current deposit accounts, special deposits and corporate free savings deposits (expiring under seven days), which are savings accounts from which funds can be deposited or withdrawn at any time, starting on February 2 of next year.

Corporate current deposit accounts, which are not able to receive interest, will retain the same conditions, considering the fact that the expense burden for banks may become greater.

Following the Four Step Interest Liberalization Plan that BOK announced in August 1991, measures for steps one through three had been taken between November 1991 and November 1995, and the interest on savings accounts that can be deposited or withdrawn at any time (expiring over seven days) had been liberalized in July 1997. In fact, given this recent settlement, interest has been completely liberalized.

As the restriction on demand deposits, which covers 10.4 percent of total deposits in won in October, relaxes, competition between banks to draw clients will become intense.

A concerned Shinhan Bank official said, “Many new financial products can be developed, but on the other hand, as competition to draw clients becomes fierce, interest rates may rise and the profitability for banks may worsen.”

Park Jae-hwan, director of the monetary policy department of BOK, emphasized, “This measure is a huge stroke on the side of abolishing financial restriction. Basic low interest conditions have been continuous, and the credit base of banks has been sufficiently enlarged, and so side effects such as rising interest rates will be limited.”

Joong-Hyun Park sanjuck@donga.com