Demand Deposits at Top South Korean Banks Drop Nearly 19 Trillion Won, Raising Loan-Rate Concerns

Demand deposits at South Korea’s five major commercial banks fell by nearly 19 trillion won in the first half of this month, fueling concerns that lending rates could rise as banks’ funding costs increase.

Financial industry data showed that as of April 16, demand deposits at KB Kookmin, Shinhan, Hana, Woori and NH Nonghyup Bank totaled 680.9236 trillion won. That was down 18.9845 trillion won from 699.9081 trillion won at the end of last month.

Demand deposits can be withdrawn at any time and are widely viewed as cash parked on the sidelines. Because they pay little interest, their balances tend to move with capital-market sentiment.

Market participants said the renewed decline suggests investors have shifted money back into financial markets, citing increased expectations for possible negotiations to end the U.S.-Iran conflict.

A sharp outflow over a short period can raise banks’ funding costs. Demand deposits help keep average funding costs low because interest expenses are limited. When those balances shrink, banks may need to rely more on higher-cost funding such as issuing bank bonds or expanding higher-yield deposit products.

That burden is likely to be passed on to borrowers, including companies, as higher funding costs can translate into higher loan rates.

Corporate borrowing costs have already been rising as market rates, including government bond yields, have swung since the Middle East situation escalated. A Bank of Korea survey showed the weighted average interest rate on corporate loans at banks stood at 4.20% a year as of February, up 0.05 percentage point from the previous month. Rates rose to 4.13% for large companies, up 0.04 point, and to 4.28% for small and midsize firms, up 0.07 point.

At the same time, demand for corporate loans to secure working capital has continued to grow. Corporate loan balances at the five banks totaled 859.7737 trillion won at the end of last month, up 15.0483 trillion won from the end of last year. In the Bank of Korea’s loan officer survey released that day, both large companies (14) and small and midsize firms (28) were expected to see higher loan demand as they seek liquidity amid rising domestic and external uncertainty.

If Middle East-driven geopolitical risks persist and upward pressure on lending rates continues, companies’ financing burdens are expected to increase further. Concerns are growing that repayment strains could widen quickly, starting with smaller firms, and weigh on the real economy.

“If the share of demand deposits falls, the average funding rate has to rise,” a financial industry official said. “Given domestic and external conditions, it is also difficult for the Bank of Korea to cut its policy rate, so upward pressure on lending rates is likely to persist for some time.”