Korean savings banks lower fixed deposit rates amid economic slowdown

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In response to a slowdown in the economy and a reduction in deposit inflows, Korean savings banks, which were engaged in fierce deposit collection earlier this year, have seen their fixed deposit rates drop to the 3 percent range after a span of five months. The banks are compelled to lower rates as they feel the strain of offering high-interest deposits to customers amid deteriorating loan performance.

According to Korea Federation of Savings Banks on Wednesday, the average rate for 12-month fixed deposits across 79 savings banks nationwide fell to 3.97 percent, dipping below the 4.00 percent mark, which represents a five-month low since July. The average rate, which stood at a robust 5.37 percent at the beginning of the year, declined to 3.74 percent in March amid market stabilization following the Legoland Korea debt payment default. Subsequently, market rate hikes propelled the average fixed deposit rate back up, breaching 4.00 percent on July 12 and maintaining the 4 percent range until recently.

“Given the economic downturn, savings banks are struggling by contracting their loan operations, unable to further expand deposit sizes,” said an official in the savings bank community. To curtail deposit inflows, savings banks are adjusting their deposit rates downward. Last year, these banks engaged in a rate competition, promising customers high interest rates exceeding 5 percent. Consequently, savings banks recorded historically high total deposits, amounting to 121.35 trillion won ($93.78 billion) at the end of last year.

However, such high-interest fund procurement has backfired as increased procurement costs have worsened profitability. Furthermore, with the rise in loan delinquency rates, savings banks have curtailed lending operations to manage their financial soundness.

This has led to concerns about the competitiveness of local savings banks. Typically, savings banks have maintained a 0.8 percent to 1.0 percent higher interest rate for fixed deposits compared to major commercial banks. However, the average rate for a one-year fixed deposit at savings banks falling below 4.0 percent contrasts with the highest offering of 4.0 percent, including preferential rates, by commercial lenders for 12-month fixed deposits, indicating a near reversal of interest rates between the two banking sectors.