By Kim Jae-kyoung
Staff Reporter
Korean banks are faced with the double burden of a rising loan-to-deposit ratio and a falling net interest margin (NIM), an indicator that their financial health is deteriorating amid the prolonged economic slump.
According to the Bank of Korea (BOK) Monday, local banks' loan-to-deposit ratio reached 90.2 percent in April, the highest in more than a decade when the figure stood at 90.3 percent in February 1998.
The ratio refers to the amount of a bank's loans divided by the amount of its deposits at any given time. A ratio of 90.2 percent means that the bank received 100 million won in deposits and extended 90 million won in loans, leaving only 10 million won at the bank.
The higher the ratio, the more the bank is relying on borrowed funds, which are generally more costly than most types of deposits. In other words, a higher ratio raises the possibility of deteriorating financial soundness.
The ratio has been rising as the government has pushed local lenders to extend more loans to small firms to revive the economy, while they had difficulty expanding the deposit base due to the economic downturn.
The outstanding balance of bank deposits dipped by 5.1 trillion won in March. It jumped by 6.4 trillion won in April but most of the increase came from demand deposits. The balance of term deposits has been on a steady decline.
On the other hand, corporate lending rose by 2.1 trillion won in March and 3.2 trillion won in April. Their mortgage lending also jumped by three trillion won in both March and April.
What is of more concern is that banks' NIM is falling in line with a rising loan-to-deposit ratio. Their NIM fell to 1.4 percent in the first quarter of this year, compared with 2.81 percent in 2005. NIM refers to the difference between the interest income generated by banks and the amount of interest paid out to their lenders.
``Although the loan-to-deposit ratio itself is not seen as a barometer of financial soundness, banks need to keep a close watch on the data as a continuing rise in the ratio can expose them to higher credit risks,'' a market analyst said.
kjk@koreatimes.co.kr
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