Domestic banks are expected to lower their overdue loan interest rates as early as this year in a belated move to keep in step with the record-low key interest rate set by the nation’s central bank.

The Financial Supervisory Service sent out an official letter to all commercial banks on Monday, recommending that they slash their rates further on pending overdue loans.

“The nation’s key interest rate has fallen by almost 2 percent since 2011, but loan interests have remained mostly unchanged,” said an FSS official.

He added that the FSS was certain that lowering the interest rate for overdue loan repayments would have no negative impact on the banks’ financial soundness, although the banks might see a fall in interest profit.

The watchdog called for the financial sector to report current loan interest rates and the amount by which the rates would be cut.

Currently, banks levy an additional interest rate on overdue loans, depending on the extent of the payment delay.

Most banks add additional interest rates of 7 percent, 8 percent and 9 percent for loan repayments that are overdue by one month, three months and six months, respectively.

Under this system, customers could face an interest rate of 13-21 percent per year if they fall into arrears.

“The cut in the overdue interest can be a means of lowering the customers’ burden, especially considering the recently lowered key interest rate,” the FSS official said.

In 2011, the Industrial Bank of Korea lowered its interest rate ceiling to 13 percent, but this neither increased the general default rate nor cut down on the bank’s profit level, the FSS claimed.

By Bae Hyun-jung (tellme@heraldcorp.com)