South Korea's financial regulator on Thursday urged banks to beef up competition and provide better services amid criticism that they sought easy profits from loan-deposit margins without making sufficient efforts to diversify income sources.

Banks have been under fire for reaping record profits from interest income last year and handing out hefty bonuses to employees while people are suffering from high borrowing costs caused by the central banks' monetary tightening to tame inflation.

The Financial Services Commission launched a task force in February to come up with measures to improve the management and business practices of the local banking system in a way that would lead to stronger competition and improve service quality for customers.

"It is not appropriate for banks to easily earn record profits through high lending margins and pay large performance bonuses without sufficient preparation for the future," FSC vice chief Kim So-young said during a meeting with the chiefs of local banks in Seoul.

"I believe that the current state of the banking industry, where competition is lacking and the industry remains in an oligopolistic structure, can be attributed to a tendency to rely on easy profits ... rather than competing and innovating to provide better services to the people at a lower cost," he added.

Kim said it is necessary for banks not only to promote competition and improve the structure of the overall banking industry but also to change the management, business practices and institutions, such as interest rate systems and performance compensation systems.

He also said the FSC will work hard to enhance the banking industry's ability to absorb losses from crises and consider ways to increase their social contribution by returning profits back to society. (Yonhap)