Among the nine financial companies sanctioned by the Financial Supervisory Service over the past five years or so for poor management of real estate project financing (PF) risks, eight were savings banks and credit unions, data showed. Savings banks and mutual finance institutions sharply expanded their PF lending instead of fulfilling their intended role of supplying funds to mid- to low-credit borrowers in their regions, yet many put risk management and internal controls on the back burner. Critics say this lax oversight has led to an increase in financial accidents such as embezzlement and a deterioration in soundness.
According to materials titled "Sanctions related to poor PF risk management" that the Financial Supervisory Service submitted on the 22nd to the office of Rep. Lee Heon-seung of the People Power Party on the National Policy Committee, from 2020 through August this year, Moa Savings Bank was sanctioned twice, OK Savings Bank once, Samho Savings Bank once, Tongyang Savings Bank once, and Gwang-an, Busanseongui, and Gyeongnam Jungang credit unions once each. The remaining institution is Gyeongnam Bank, where a PF business manager committed an embezzlement totaling about 300 billion won.
OK Savings Bank received an institutional caution in Mar. 2021 over bribery related to PF lending duties. According to the sanction notice disclosed by the financial authorities, employee A at OK Savings Bank handled PF loans totaling 23.2 billion won between Apr. and Aug. 2019 and received 710 million won in money and valuables from the borrower (the developer).
At Moa Savings Bank, which is based in the Incheon and Gyeonggi regions, PF loan manager B committed a financial crime by forging documents to obtain corporate loans and siphoning off about 5.9 billion won, leading to an institutional warning in Feb. last year. Sanctions on financial companies are classified as "institutional caution, institutional warning, corrective order, business suspension, and registration/license revocation," with institutional warnings and above deemed heavy penalties. Samho Savings Bank, headquartered in Jeonju, received an institutional warning and took actions such as dismissing an employee over embezzlement and breach of trust by executives and staff that occurred during PF lending operations.
Unit credit unions were flagged for signing commitments for unsold-home collateral loans. A commitment for unsold-home collateral loans means that if there are unsold units such as apartments after completion, a financial company promises to lend funds to the builder with those units as collateral, or to guarantee payment of construction costs and financial principal and interest (principal + interest). When there are unsold units, the financial company bears the risk, creating contingent liability, and accounting treatment was not properly conducted, the FSS explained.
PF loans are large in scale, so losses can be massive if risk management is inadequate, and the fallout can be significant. They can also easily lead to financial crimes such as embezzlement and breach of trust. The Gyeongnam Bank employee who committed the largest embezzlement in the financial sector had worked only in PF for 15 years and siphoned off funds by exploiting gaps in internal controls.
In the financial sector, there are claims that poor management of PF loans has affected the deterioration of soundness among secondary financial institutions. As of the end of the first quarter this year, the average delinquency rate at Korea's 79 savings banks was 9%, while the rate at credit unions was in the 8% range. An official at the financial authorities said, "The slowdown in the real estate market and increased credit loss expense due to poor risk management affected the soundness of secondary financial institutions, pushing up delinquency rates."