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[Editorial] Wrongful calculation

Banks were found to have effectively manipulated interest rates on loans

Household debt rose to an all-time high of 1,468 trillion won ($1.317 trillion) as of the end of the first quarter of this year. The household debt service ratio, which indicates the proportion of principal and interest payments to household income, hit a five-year high last year. Many households are now deep in debt.

In this situation, banks reportedly have increased their incomes by raising interest rates on loans unfairly. They have undermined consumers’ trust in them by themselves.

Banks have been already under criticism for distressing borrowers by lowering interest rates on deposits and raising those on loans.

An effective manipulation of loan interest rates is an act of cheating borrowers. It cannot be excused as banking practice.

Every bank runs a computer program to calculate interest rates by inputting information on loan applicants, such as credit scores, income levels and appraised collateral value.

The Financial Supervisory Service recently discovered thousands of wrongful calculations of interest rates on loans after inspecting related computation systems of nine banks from February to May.

Cases of bank employees omitting or reducing incomes of loan applicants took the lion’s share of faulty calculations. In many instances, they did not input collateral at all even though applicants held assets, or starkly disregarded interest rates computed by their systems and instead applied the highest permissible interest rates arbitrarily.

Interest rates to be added or discounted depending on borrowers’ financial status must be recalculated regularly and reasonably by taking into full account changes in client factors as well as market conditions.

However, banks calculated additional interest rates wrongfully, increasing the burden on borrowers and expanding their own revenues.

Thousands of faulty calculations of additional interest rates may be small in number compared to the total number of bank loans. Even if so, they cannot be categorically dismissed as few.

Banks cite “employee errors,” but the problem did not take place at just a few bank branches, but was found extensively across many branches of the banks.

It arouses suspicion that interest rate computation systems made errors or banks have done faulty calculations intentionally and routinely.

The financial watchdog did not disclose specifics about overcharged interest even though the scandal had been brought to light. Thousands of victims are in the dark about whether they have been overcharged or not. The problem may be more serious at savings banks and other minor financial institutions. Investigation into all lenders is needed.

Financial Services Commission Chairman Choi Jong-ku seems to be taking the incident lightly, though. He has taken the position not to sanction banks, saying “the faulty calculation of interest rates on loans is bank employees’ violation of their bylaws.”

His remark can be perceived by the FSS under the commission as a guideline for bank supervision and by the banks as exoneration. It gives an impression that the financial authorities put the interests of financial institutions before consumer protection.

The financial authorities said they would make banks investigate their branches and refund overcharged interest. Of course they should. The authorities must check whether the refunds are made in full.

The US Federal Reserve raised the federal funds rate by 0.25 percentage points on June 13. As a result, its target range has gone higher than interest rates of South Korea by 0.25 to 0.5 percentage points. The Bank of Korea cannot but feel stronger pressure to raise its key interest rate. Most worrisome in case the key rate is hiked is an increase in interest burden on households in debt.

Banks earned nearly 10 trillion won from net interest margin -- the difference between interest rates on deposits and loans -- in the first quarter alone.

Even if banks cannot be forced to reduce the interest burden on households, the financial regulator must tighten its supervision over banks to prevent the recurrence of similar incidents. Also, using this opportunity, the authorities should discourage banks from trying to make more easy money by widening the net interest margin.