SC Bank Korea warned that the banking sector’s provision of high initial interest on savings, such as those offered for the disputed long-term property formation savings, may end up eroding their profit margins.

The property formation savings is a long-term savings plan that is designed to support low-salary earners. They guarantee high, fixed amount of interest rates in the first three years and lower them significantly afterwards.

The bank has given up aggressive promotions of this savings plan based on the observation that it introduces self-destructive competition in the sector, said Park Jong-bok, the head of distribution at SC Bank Korea. 

“There is hyper-competition among banks (regarding property formation savings). Frankly speaking, the savings plan is doomed to bring a reverse margin to the banks. It also confuses the low-income clients as the interest rate suddenly drops after the first three years,” he said.

The government also has raised concerns about reasonability and fairness in funding, he said, noting the meeting between the Financial Supervisory Service and bank chiefs last week. “We insist on savings options that can actually help out low-income earners.”

For its part, the lender said it has a different approach for supporting low-income, low-credit clients, which was after all, the idea of these savings plans.

The bank also has other products, such as those that offer tax breaks and up to a 4.5 percent interest.

Chris de Bruin, the bank’s executive vice president and head of consumer banking in Korean and Japan, stressed that the company will “continue with customer-centered, value-propositional and multi-channeling strategies.”

He added that SC Bank is in for the long run, and will therefore be focused on long-term profit.

By Chung Joo-won (joowonc@heraldcorp.com)