Gov`t Wary of Banks` Attempt to Raise Interest Rates

Financial authorities are trying to prevent banks from raising interest rates on loans by changing the benchmark interest rate, warning that consumers could be affected by rising rates.

They will also review whether the interest spread added to the benchmark rate depending on a loan applicant’s credit history is excessively high.

A top official said yesterday, “Since the fall of (certificate of deposit) rates, or the benchmark for adjustable rate loans, commercial banks have tried to change the interest rate structure. That is inappropriate, however, as it might come off as an attempt to charge more interest at a time when rates are declining.”

Banks have pushed for measures to change the benchmark interest rate for adjustable rate loans from CD rates. They want a new program that takes into account the weighted average of bank bonds and CD rates, and savings rates. Since the bank bond rate two percentage points higher than the CD rate, interest on adjustable rate loans, which account for 90 percent of household loans, are likely to consequently head upwards with the change.

“Banks add an interest spread of around three percent to the benchmark. Since that figure was around one percent last year, we must look into whether the rise can be justified,” the official said.

Consequently, the Financial Supervisory Service will check if banks are adding an appropriate level of interest spread depending on credit history when conducting comprehensive inspections on banks next month.

legman@donga.com chance@donga.com