(Yonhap Editorial)

SEOUL, March 21 (Yonhap) -- Prosecutors are investigating allegations that Korea Exchange Bank (KEB) raked in more than 18 billion won (US$16.2 million) in illegal profits by deliberately raising lending rates for smaller firms from 2006 to 2012. The latest incident should make the banking industry reflect on itself and regain the public's trust.

The alleged rip-offs of more than 3,000 smaller firms, which were perpetuated when the bank was owned by U.S. buyout fund Lone Star Funds, have prompted the Financial Consumer Agency, a South Korean consumer advocacy group, to lodge a class action suit against the entire banking industry over their practice of imposing high spreads on lending rates. It marks the first time a major lender has been investigated by the prosecution on suspicion of manipulating interest rates for illegal profit-taking.

Usually, spreads are calculated based on borrowers' creditworthiness and the value of collateral, but KEB is suspected of randomly hiking the spreads without making new agreements with borrowers. The advocacy agency said that other banks might have engaged in similar practices, calling for authorities to expand the investigation into other banks.

It has been alleged that KEB executives coerced their branches into raising lending rates if they fell short of meeting their so-called respective profit target ratio. The probe is expected to spark heated public criticism as part of those illegally obtained profits may have been given to the lender's owner Lone Star in the form of dividends during the reported period. Lone Star Funds' ownership of KEB had spurred constant debate and hostile sentiment since the U.S. firm was paid high dividends, which some market watchers claimed were excessive.

KEB paid the U.S. buyout fund a combined 1.79 trillion won in cash dividends over eight occasions from 2007 to 2011. The figure could have included the additional interest that the country's small- and medium-sized companies had to pay without knowing the reasons for the higher spreads. As ex post facto measures, the bank came up with a system aimed at preventing similar irregularities from taking place and promised to reimburse the 18.1 billion won to the borrowers. In the first place, however, the bank should have offered a sincere apology to its customers over the incident. It is lamentable that the bank feigned ignorance by saying prosecutors' raid of the bank's headquarters as part of the investigation on Tuesday was actually not a raid.

Prosecutors are expected to put their focus on finding out whether the bank's management, including current KEB chief Yun Yong-ro, was involved in the illegal practice. There is a speculation that the investigation could spread to other banks as reports swirled that one or two other banks have shown signs of being involved in similar illegal lending practices. It is hoped that investigators will carry out a thorough investigation to find out the real scope of the scandal.

With the revelations, banks are asked to review the business practice of lining their pockets by extending loans to smaller companies and ordinary people at higher rates. The KEB scandal causes us to raise suspicion that the industry may have lost its ability to police itself. The financial authorities also need to strengthen their surveillance activities on the industry. But what is of vital importance should be banks' soul-searching efforts and self-reflection.

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