Starting July 1, banks in South Korea will be prohibited from fully passing certain statutory costs on to borrowers, a change expected to reduce loan rates by about 0.2 percentage points, financial authorities said June 29.
Under current practice, banks include legal contributions—such as fees paid to various guarantee funds—in the “spread” component when calculating loan interest rates. For example, contributions to the Korea Technology Finance Corporation, Korea Credit Guarantee Fund and regional credit guarantee foundations have been added to corporate working-capital loan rates in proportion to each bank’s outstanding loan balances.
The revised Banking Act, adopted at the end of last year, bars banks from reflecting three categories of costs in lending rates:
• Reserve requirements• Deposit insurance premiums• Contributions to the Korea Inclusive Finance Agency
Banks voluntarily stopped including the first two items under revised lending-rate guidelines in January 2023.
Contributions to guarantee funds will face stricter limits. For loans backed by a guarantee (“guaranteed loans”), no more than 50% of fund contributions may be added to the borrower’s rate. For non-guaranteed loans, reflecting such contributions is fully prohibited. Affected funds include the Korea Credit Guarantee Fund, Korea Technology Finance Corporation, Agricultural and Fishery Credit Guarantee Fund, regional credit guarantee foundations and the Korea Housing Finance Corporation’s credit guarantee fund.
Financial authorities will require each bank to conduct compliance checks at least twice yearly and to keep detailed records. They expect the measures to ease borrowers’ burdens and promote banks’ social responsibility.