The Korea Institute of Finance, a state-run think tank, said in a report on Sunday that the country’s private banking market needs a revision to the related law to bolster growth and stay competitive in the long term.

In a report titled “The potential and limitation of South Korean private banking,” the KIF said the PB industry appears to be growing at a steady pace but the quality of services is falling behind, with lenders struggling to turn out a profit from their supposedly premium banking services targeting wealthy customers.

Banks and other financial institutions are providing customized PB services to their clients with sizable disposable income, and total deposits managed by PB professionals rose to 86.4 trillion won as of the first half of 2010, up from 48.5 trillion won in 2003. Lenders have not released profits they made from PB services yet, but industry watchers pointed out that PB businesses rarely outperform other general banking services in terms of profitability.

The KIF said the sluggish PB industry here is largely due to the strong restrictions imposed on the way banks handle the customer’s deposits. Unlike other countries such as the United States where private banking services generate profits from investment-related consultation and asset management, Korean banks cannot engage in active portfolio management of their clients’ money. Instead, local lenders rely heavily on selling financial products and extending loans ― both of which come with lower profits margins than financial consulting services.

The report argued that regulatory control should be lifted to help Korean financial institutions beef up their PB services at home and enter foreign markets in the long term.

A revision to the banking law should be made in a way that allows lenders to take consulting fees from clients in the fields of real estate investment, inheritance and other customized asset management services.

By Yang Sung-jin (insight@heraldcorp.com)