Banks under fire for improper profits

Local banks are increasingly under public criticism for their alleged improper profiteering from loan interest rates.

A 50-something living in Seoul vented anger, saying that she recently failed to reimburse her loan because the bank informed her anew that there are penalties when paying back in advance.

“The bank offered a low interest rate when I first went to get a loan, but the rate got higher later even though I once changed it to a interest rate, seeing the economic situation worsening. The bank did not mention anything about the change but told me to sign papers if I wanted to extend the loan. I wanted to pay back in advance because of the hiking interest rate,” she told The Korea Herald, wishing to remain anonymous.

The Board of Audit and Inspection of Korea announced on Monday that it found about 60 cases in which local banks took undue profit by abusing loan interest rates such as by adding unreasonable conditions to borrowers’ credit ratings. It was to make up for the expected losses following the recent drop of the key interest rate to 3 percent.

The top auditor said that major banks earned over 20 trillion won from October 2008 to December 2011 by charging additional interest rates. Household and company debts increased during the period as the nation’s key interest rate was cut.

“Consumers are utterly despondent and even feel robbed. Banks are abusing loan interest rates as they please, so the borrowers are being taken advantage of,” said an official at Financial Consumer Agency.

Premiums on household loan interest rates rose from 1.73 percent to 2.57 percent after the 2008 world financial crisis, and with companies, from 1.78 percent to 2.71 percent, according to BAI. It means that households gained an extra burden of 3.8 trillion won and companies 16.6 trillion won since 2008. The increased amount makes up about 9.9 percent of the 106.3 trillion won profits Korean banks made from interest on loans.

Banks have been tampering with loan interest rates in various ways.

Shinhan Bank, for example, refused to give loans to 14,138 people, over 31 percent of those who requested loans between 2008 and 2011, for their lack of education, according to BAI. The bank added “educational backgrounds” in the credit rating category and gave 54 points to those with an M.A. or Ph.D. and 13 points to those who did not graduate college or universities. As a result, 48.7 percent of borrowers had to pay a total of 1.7 billion won more interest rate to the bank.

Despite the bank’s explanation that the category was used in case of first-timers who had no other data to prove their credibility with, consumers are furious.

“It was morally wrong to judge a person in that way, regardless of any approval or rating procedures,” said the FCA official.

Other banks added unreasonable categories as well, like “credibility premium,” “liquidity premium” or the bank’s “target profit,” which are under criticism for necessity and unclear criteria.

Some branch managers even discretionally imposed premiums on loan rates after the key interest rate was dropped, abusing the system which managers were given the right to change interest rates at their discretion. A total of 1.55 trillion won of additional profits were made between 2009 and 2011, abusing the system.

“If banks make announcements in advance to consumers or media before raising interest rates and why it is necessary, consumers will be able to judge in advance, as well, if it is just and have less complaints,” said an official at Korea Finance Consumer Federation.

BAI is known to have warned the Financial Supervisory Service and Financial Services Commission, confirming that the financial authorities did not properly supervise financial institutions.

It also plans to reveal next month the how FSS and FSC are doing their supervisory works.

Major banks as well as brokerages were also probed earlier this month under allegation that they fixed rates on certificates of deposit.

By Park Min-young (claire@heraldcorp.com)

Intern reporter Lee Jin-yong contributed to this article.