SEOUL, December 29 (AJP) - South Korean banks are raising deposit rates aggressively to stem an outflow of funds into buoyant stock markets at home and abroad, triggering an unusual inversion in short-term deposit yields and adding pressure to already strained borrowers.
The competition for liquidity has pushed both lending and deposit rates higher, even as the Bank of Korea keeps its policy rate on hold. According to data released Monday by the central bank, the average interest rate on new bank loans rose 0.13 percentage point in November to 4.15 percent, reversing a three-month decline.
Household loan rates climbed 0.08 percentage point to 4.32 percent, while corporate loan rates rose 0.14 percentage point to 4.10 percent. Household rates reached a seven-month high, and corporate rates turned upward for the first time in six months.
Jeonse (long-term rental deposit) loan rates — closely tied to household living costs — also increased for a second straight month, rising 0.12 percentage point to 3.90 percent.
Short-term rates jump as banks scramble for liquidity
The upward pressure is most visible in short-term lending and deposit products, reflecting banks’ urgent need to secure liquidity. General credit loan rates jumped 0.27 percentage point to 5.46 percent, while mortgage rates rose 0.19 percentage point to 4.17 percent, their biggest November increase in four years and the first return to the 4 percent range in eight months.
Banks have been raising add-on rates preemptively following the government’s Oct. 15 real estate measures, which tightened “stressed debt service ratio (DSR)” rules. At the same time, short-term market yields have climbed after the Bank of Korea maintained a hawkish tone while keeping its benchmark rate unchanged.
The one-year bank bond yield rose 0.27 percentage point in November, outpacing the 0.18 percentage point increase in five-year yields. As a result, loans tied to short-term rates — especially general credit loans — saw the steepest increases.
Despite rising borrowing costs, the share of fixed-rate household loans continued to fall. Fixed-rate loans accounted for 54.6 percent of household lending in November, down 1.6 percentage points from the previous month and marking a fourth consecutive decline. Within mortgage loans, the fixed-rate share dropped 3.8 percentage points to 90.2 percent, suggesting borrowers are increasingly betting on future rate cuts after perceiving that interest rates have peaked.
SMEs face heavier burden as risk premiums widen
Small and medium-sized enterprises are bearing a disproportionate share of the tightening. SME lending rates rose 0.18 percentage point to 4.14 percent, compared with a 0.11 percentage point rise for large corporations, whose average rate stood at 4.06 percent.
The wider gap reflects rising risk premiums tied to concerns over SME creditworthiness. Bank of Korea data show that so-called “marginal firms” — companies unable to cover interest payments with operating profits — accounted for 18.0 percent of SMEs in 2024, well above the 13.7 percent recorded among large corporations.
Deposit rates overtake savings banks for first time since 1998
On the funding side, deposit rates rose 0.24 percentage point to an average of 2.81 percent in November, outpacing the increase in lending rates and narrowing banks’ net interest margin on new transactions by 0.11 percentage point to 1.34 percent.
A notable development is that commercial bank deposit rates have surpassed those offered by savings banks for the first time in roughly 27 years, since the 1998 Asian financial crisis. The reversal reflects sharply diverging strategies: savings banks, constrained by exposure to troubled real estate project financing and weak loan demand, have frozen or lowered rates, while major banks have raised them aggressively to prevent capital outflows.
An inversion has also emerged within deposit maturities themselves. According to the Korean Statistical Information Service, the average rate on deposits with maturities under six months stood at 2.58 percent, higher than the 2.43 percent offered on deposits with maturities of two to three years — a clear signal of banks’ urgency to secure short-term funds.
Funds flow accelerates from deposits to markets
The liquidity squeeze is being amplified by a massive shift of household money into financial markets. Data from the Korea Financial Investment Association show inflows into public offering funds reached about 66.8 trillion won ($46.6 billion) as of Sunday, more than triple last year’s 22 trillion won.
The surge underscores how capital is rapidly migrating from bank deposits into equities and investment products, intensifying competition among banks for funding and helping explain the sharp rise in short-term deposit rates.
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