Lending Policy of Banks in South Korea

Presentation by YUVRAJ SAMANT

Roll No 784

The central bank of South Korea. It was founded on June 12, 1950 under the Bank of Korea Act. The primary purpose of the Bank is to pursue price stability.

The benchmark interest rate in South Korea was last recorded at 2.75 percent. Interest Rate in South Korea is reported by the Bank of Korea

Bank of Korea

In South Korea the interest rates decisions are taken by the Bank of Korea’s (BOK) Monetary Policy Committee. The official interest rate is the Bank of Korea Base Rate which was changed from overnight call rate on March 2008.

Bank of Korea

Bank of Korea

When reference is made to the South Korean interest rate this often refers to the Bank of Korea base rate. Before, the Korean interest rate was called the overnight call rate, but since March 2008 the term Bank of Korea base rate or base rate is being used. By changing the Bank of Korea base rate the central bank of Korea is influencing the interest rate of products like mortgages, credit and savings accounts. Doing so the consumption and investment levels are being influenced which has an effect on price levels and therefor on inflation

Bank of Korea

THE FINANCIAL SERVICES COMMISSION, THE COUNTRY’S MAIN FINANCIAL REGULATOR

APPROVED INTRODUCTION OF A BENCHMARK TO BE BASED ON BANKS’ AGGREGATE FUNDING COSTS. THE NEW BENCHMARK

RATE – KNOWN AS THE COST OF FUNDING INDEX, OR COFIX – WILL BE CALCULATED AND PUBLISHED BY THE KOREA FEDERATION OF BANKS, AN

INDUSTRY GROUP

New Benchmark Rate

All consumer lending areas continued to grow in 2012 in both gross lending and outstanding terms. However, growth was slightly slower than in 2011, except within education lending. Although growth within consumer

lending is slowing, the general picture within consumer lending is not a very optimistic one. According to

Statistics Korea, the total consumer Debt-to-Income (DTI) ratio is way above the OECD average. In addition, Korea Housing Finance Corporation statistics show the risky level of total consumer lending in South Korea.

Consumer Lending

Added government supporting loan services is expected over the forecast period. Since these government funds provide low interest rates to consumers, commercial banks and secondary financial institutes could be forced to lower interest rates in order to compete with these loan services. This may be good for consumers in the short term due to cheap interest expenses. However, in the long term this will have a bad impact on the market.

Govt. Support to Consumer Lending

1

South Korean banks were expected to tighten their lending practices in the

first quarter due to the predicted credit risk expansion amid the economic

slowdown, central bank data showed Thursday.

Lending attitude index, which gauges local banks‘ lending practices over the next three months, stood at minus 2 for

the January-March period, down from 2 in the previous

quarter, according to the Bank of Korea (BOK).

The figure marked the lowest since minus 4 tallied in the

fourth quarter of 2009. Local lenders replied that debt-

servicing capabilities of both companies and households would weaken due to the

persistent risk factors such as the eurozone fiscal crisis and

the global economic downturn.

Banks tighten Lending

Mortgage loans extended by banks decreased 2.3 trillion won in January after rising in

the prior

Average annual rate on bank deposits declined 10 basis

points from a month earlier to 3 percent in January as

market interest rates stayed at a low level in tandem with the BOK's monetary easing

stance. The central bank cut its policy rate in July and October last year. month.

Level of Lending

The rate for market-type

financial products such as

certificate of deposit

decreased 11 basis points, with

the one for savings deposits falling 10 basis

points.

The rate for new corporate loans

inched up 3 basis points in January

after falling 4 basis points in the previous

month.

Level of Lending

Bank lending rates in South Korea rebounded in January from a record low level as demand for mortgage loans reduced amid the end of temporary tax benefits for housing transactions 

Weighted average annual rate for new loans extended by banks to households and companies was 5 percent in January, rebounding from an all-time low of 4.84 percent in the prior month, according to the Bank of Korea (BOK).

Level of Lending

Thank You