Banks start raising interest rates

Local banks are raising interest rates for personal loans and mortgages after the Bank of Korea raised its key rate by 25 basis points to 2.25 percent on July 9.

According to industry sources yesterday, Citibank raised the interest rate for personal loans by as much as 12 basis points.

Three-month personal loan rates at Citibank increased 7.76 percent from 7.64 percent, while those for a one-year loans rose to 7.91 percent from 7.84 percent.

Hana Bank also raised rates for personal loans by 12 basis points following a 20 basis point increase last month, with loan rates ranging from 5.61 percent to 7.97 percent depending on the duration of the loan.

On July 9, immediately following the rate hike by the BOK, banks collectively raised mortgage loans tied to the value of 3-month certificate of deposits (CDs) by 17 basis points.

Housing loans tied to the cost of funds index, or Cofix, jumped 34 basis points.

Loans for small and midsized companies (SMEs) have also been affected by the interest rate hike.

Commercial banks have raised interest rates for SMEs from 2 basis points to 15 basis points.

The BOK interest rate hike is estimated to have increased the annual interest burden by 3.5 trillion won ($2.92 billion), particularly affecting lower-income borrowers and SMEs, which are subject to relatively high interest rates.

The calculation is based on an estimated 1,400 trillion in loans, including principal, that is held by companies and individuals.

In addition, citizens with low credit ratings are usually forced to turn to money lenders who charge sky-high interest rates since they have problems securing loans from banks.

Financial experts advise that new credit facilities should be established that would occupy the middle ground between banks, who charge interest rates of less than 10 percent, and private lenders, with 30 to 40 percent interest rates.

Hyun Oh-seok, the chairman of Korea Development Institute, warned that further interest rate hikes were likely.

He said in an interview with Yonhap that “the current key interest rate is at quite a low level” and “should be raised to gain room” for economic readjustments.

“If Korea reaches an economic growth rate of 6 percent this year and consumer prices rise 3 percent, a key interest rate of 3.15 percent is appropriate,” said Park Deok-bae, a fellow of the Hyundai Research Institute, in a report.