FSS Launches Inspection into 3 Banks for Charging Unfairly High Interest Rates

The Financial Supervisory Service (FSS) has started an intensive investigation into Kyungnam Bank, KEB Hana Bank, and Citibank Korea as they have been found to have charged their customers higher than normal interest rates on loans.

On June 21, the FSS announced the outcome of its recent inspection into the lending practices of domestic banks. It said it had found that some banks had applied unfairly high interest rates to some borrowers by falsifying their ability to repay or ignoring their provision of collateral. At the time, it did not disclose the names of the banks that overcharged their customers.

The FSS made public on June 27 the names of the banks that had used unethical lending practices.

According to the FSS, Kyungnam Bank collected unfairly high interest rates from customers in a total of 12,000 cases. About 100 of the bank’s total 165 branches overcharged their borrowing customers.

Kyungnam Bank said it was by mistake, not on purpose, that its branches applied wrong interest rates to their customers. It said it had received 2.5 billion won more due to the errors in calculating interest rates on loans and would refund it within next month. The bank’s employees forgot to enter the borrowers’ annual income or entered reduced figures, thus raising their debt ratio and raising additional interest rates on their loans by up to 0.50% point.

Apart from the adequacy of the refund, the FSS plans to investigate how borrowers’ annual income was entered wrongly in many branches of Kyungnam Bank. An official from FSS said, "Banks are supposed to receive withholding receipts from loan applicants. The branches of Kyungnam Bank simply did not put in the amount of income shown on the receipts or arbitrarily entered it, and those who screened loan applications simply failed to detect the errors.”

Kyungnam Bank explained that it conducted its own inspection and the error was not deliberate. The bank said it was a “mistake” not to check borrowers’ annual income thoroughly during the computer registration process.

The FSS, however, believes that the fact that the error was repeated in 100 or so branches is due to the laxities of the system, a sign that the bank has a serious problem with internal control.

The FSS said that the scale of the problems in KEB Hana Bank and Citibank Korea are smaller than Kyongnam Bank, but they also reveal a poor system of calculating loan interest rates.

KEB Hana Bank sets a loan rate by applying a non-quantitative factor to the "system interest rate,” which is computationally calculated, and branch employees or managers arbitrarily applied the highest interest rate regardless of the type of the loan, individual, self-employed, or corporate.

An official from the FSS said, "KEB Hana Bank has a system that can easily levy the highest interest rate without any grounds and the borrowers just are just forced to pay more interest without knowing it.”

Citibank had cases of calculating interest rates high because borrowers were entered to have no collateral when actually they had. On the other hand, there were the opposite cases in which the interest rate was calculated low because the borrowers were entered to have collateral when they didn’t.

Other than the three banks, the FSS asked other local banks, which were excluded from the loan interest rate system inspection, to conduct their own inspection and report.