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Debt repayment burdens may increase for local households and companies
August 17, 2009
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The rate on CDs, a measure of local interest rates, has surged of late amid expectations that the pace of economic recovery will accelerate, which could push the central bank to raise interest rates to contain inflationary pressure. The rate on three-month CDs, which have long been considered as the basis by which local banks set rates for their floating-rate loans, rose 0.02 points on Friday to close at 2.47 percent, the highest rate since March 6, when the number stood at 2.49 percent. The 0.02-point increase was also the biggest daily gain since Oct. 15, 2008. The CD rate has been stagnant for the past three months, hovering around the 2.41 percent mark. But last week, the rate started climbing at a pace unseen in months. Its 0.06-point gain was achieved just in the last week. This development is not expected to bode well for households and companies that borrowed from the lenders that readjust their loan rates according to changes in the CD rate. Kookmin Bank announced last week it would lift the rate on its floating-rate loans into the 2.71 to 4.41 percent band beginning this week, up 0.03 points from the previous week. Woori and Shinhan Banks also lifted their loan rates into the 3.33 to 4.63 percent band and the 3.23 to 4.53 percent band, respectively, a change of 0.01 points. That means those who have borrowed floating-rate loans from these banks will now face bigger debt repayment burdens. If the CD rate continues to increase like it did in the past week, the financial burden on borrowers will be even greater. About 90 percent of the loans made by Korean banks are floating-rate loans whose interest rates are adjusted according to changes in the CD rate or other benchmark interest rates. “People really need to think twice about their ability to repay their debt,” said Ko Kwang-rae, chief of Kookmin Bank’s retail lending division. He advised prospective borrowers to think “more conservatively” about their debt repayment ability. Bank of Korea Governor Lee Seong-tae said earlier this month that the central bank would “continue to ease monetary policy for a while as well as see how the economic situation plays out in the third-quarter,” a comment many bond traders interpreted as a sign of a possible rate hike in the fourth quarter. “The CD rate is likely to climb 2.55 to 2.6 percent in a short-term,” said Shin Dong-joon, analyst at Hyundai Securities. By Kim Won-bae, Jung Ha-won [hawon@joongang.co.kr] |
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