The financial authorities have begun a full-scale overhaul of the struggling mutual finance system. As criticism has grown that mutual finance is not properly fulfilling its role as a 'community-based microfinance institution' grounded in the collective bond of its members, they have initiated a major surgery.
Mutual finance irresponsibly increased real estate project financing (PF) loans during the booming construction market in 2021. Subsequently, the soundness of the sector deteriorated sharply due to the aftermath of high-interest rates and a tightening PF market. Saemaul Geumgo, credit unions, and fisheries cooperatives recorded the largest deficits in history last year. The financial authorities have decided to reorganize the regulations surrounding mutual finance's lending operations, business practices, and overall governance.
According to the financial sector on the 22nd, the Financial Services Commission and the Financial Supervisory Service (FSS) held the first meeting of the 'mutual finance system improvement task force (TF)' on March 6 and discussed reform measures. The meeting was attended by the financial authorities and the relevant ministries for mutual finance, including the Ministry of the Interior and Safety, the Ministry of Agriculture, Food and Rural Affairs, and the Ministry of Oceans and Fisheries among other relevant organizations. An FSS official noted, "We are selecting detailed agendas such as 'risk,' 'soundness,' 'lending operations,' 'business practices,' and 'governance' and are developing institutional improvement measures for each individual item in a working group."
The financial authorities aim to strengthen the essential roles of mutual finance. In reality, mutual finance has significantly reduced its member loan ratios over the past decade. According to the FSS's financial statistics information system, the loan ratio for credit unions dropped from 81.8% at the end of 2014 to 50.5% at the end of last year, a decline of 31.3 percentage points. During the same period, NongHyup (35.4% to 24.3%), fisheries cooperatives (22.1% to 15.4%), and forestry cooperatives (50.3% to 36.2%) also saw their loan ratios to members decrease.
In contrast, the loan ratio for quasi-members, who make investments to join, has increased. Quasi-member loans mainly consist of loans for small business owners and self-employed individuals, as opposed to policy loans made to agricultural and fisheries workers. To strengthen its business with quasi-members, mutual finance is increasing the disbursement of mortgages in the metropolitan area, which deviates from its founding purpose.
A typical example is group lending (such as interim loans provided during collective apartment sales). Generally, group loans can be in the hundreds of billions or trillions, allowing for substantial revenue generation with secure collateral, minimizing loss risks. The group loans from mutual finance have sharply increased in recent years. According to the FSS, the balance of group loans in mutual finance surged more than fivefold, from 1.7 trillion won at the end of 2020 to 9 trillion won by the end of June last year. Controversy arose when the Seoul Gangdong NongHyup and Gwangju and Jeonju NongHyups entered the competition for remaining loans for the country's largest reconstruction project, Dunchon Jugong (Olympic Park Foreon), last year.
The financial authorities believe that constraints are needed on these business practices. Plans to strengthen regulations by increasing the loan ratio for members are being discussed. Most mutual finances are required to maintain member loans at over half of total loans, but many places have exceeded 50% in real estate and construction loans due to the expansion of mortgages and aggressive PF lending. Earlier, ChosunBiz reported that according to the FSS's data on mutual finance risk management, 12% or 104 of the 866 local credit unions had handled real estate and construction loans beyond their limits as of the end of last year.
There are urgent concerns regarding profitability and soundness management, which have deteriorated due to the poor performance of PF loans. Saemaul Geumgo recorded a net loss of 1.7382 trillion won last year, marking the largest deficit since its founding in 1963. Credit unions and fisheries cooperatives also recorded respective net losses of 341.9 billion won and 272.5 billion won. Similarly, these are the largest deficits since their establishment. Furthermore, the ratio of arrears has worsened. As of the end of last year, the arrears rates for Saemaul Geumgo, credit unions, and fisheries cooperatives were 6.81%, 6.02%, and 6.74%, respectively, each rising by about 2 percentage points compared to the end of the previous year.
The financial authorities have decided to strengthen governance regulations to ensure effective risk management. While mutual finance has grown larger than savings banks, it is subject to looser regulations. For example, savings banks must appoint an internal auditor if their total assets exceed 100 billion won, but only cooperatives over 800 billion won are required to have an auditor. Saemaul Geumgo has no obligation to appoint one. The financial authorities are revising the enforcement ordinance of the Saemaul Geumgo Act to require the appointment of internal auditors. An FSS official noted, "We are considering improving governance by strengthening regulations regarding the appointment of auditors to ensure that the oversight function operates effectively."