The Financial Services Commission (FSC) plans to meet within the year with the ministries that hold supervisory authority over mutual finance institutions to discuss a regulatory plan on real estate project financing (PF) loan limits. Setting an upper cap on the share of real estate PF loans within total loans at mutual finance institutions is expected to be the most likely approach. As the soundness of mutual finance institutions has deteriorated rapidly due to recent troubled real estate PFs, it appears the authorities are pushing to apply the same regulations as those for other sectors such as savings banks.
According to the financial industry on the 4th, the Financial Services Commission (FSC) is coordinating views with the Ministry of Agriculture, Food and Rural Affairs, the Ministry of Oceans and Fisheries, the Korea Forest Service, and the Ministry of the Interior and Safety (MOIS) to place PF loan regulations for mutual finance institutions on the agenda of the "2nd Mutual Finance Policy Council," to be held within the year. Currently, the Ministry of Agriculture, Food and Rural Affairs oversees NongHyup, the Ministry of Oceans and Fisheries oversees the National Federation of Fisheries Cooperatives, the Korea Forest Service oversees the National Forestry Cooperatives Federation, and the Ministry of the Interior and Safety (MOIS) oversees the Korean Federation of Community Credit Cooperatives (KFCC). Among mutual finance institutions, only the credit unions are supervised by the Financial Services Commission (FSC).
The regulation the Financial Services Commission (FSC) is pursuing would set an upper cap on the share of PF loans within total loans at mutual finance institutions. The financial authorities limit savings banks' lending to the real estate and construction sectors to within 50% of total credit exposure. Of that, PF loans must be managed separately within 20% of the total. The financial authorities restrict mutual finance institutions' loans to the real estate and construction sectors to within 30% of total credit exposure each, and a combined 50% or less, but unlike savings banks, there is no separate cap on PF.
Initially, the Financial Services Commission (FSC) had been preparing since March to work with the relevant ministries to push the regulation. However, the process was reportedly delayed by issues including the presidential election and a reorganization of the financial authorities.
The Financial Services Commission (FSC) is pushing this regulation because the soundness of mutual finance institutions has deteriorated rapidly due to recent real estate PF loans. Real estate PF is an investment method in which development funds are borrowed with sales revenue as collateral. Korea's real estate PF market grew rapidly between 2020 and 2022, influenced by increased supply during the COVID-19 recovery, but project viability deteriorated sharply from the second half of 2022.
As of the end of 2022, the delinquency rate at local NongHyup, the National Federation of Fisheries Cooperatives, and the National Forestry Cooperatives Federation was only 1.21% to 2%. But in the first half of this year it surged to 5.07% for NongHyup, 8.11% for the National Federation of Fisheries Cooperatives, and 7.46% for the National Forestry Cooperatives Federation. The credit unions' delinquency rate in the first half of this year was 8.36%, up 5.89 percentage points from 2022 (2.47%). The delinquency rate at the Korean Federation of Community Credit Cooperatives (KFCC) hovered around 2% through 2021 but jumped to 8.37% in the first half of this year.
As of the first quarter of this year, total PF exposure across mutual finance institutions was 43.5 trillion won, of which nonperforming loans totaled 11.3 trillion won. The financial authorities believe a significant portion of the distress is related to the Korean Federation of Community Credit Cooperatives (KFCC). Recently, NongHyup and the credit unions were also known to have mainly handled bridge loans, which are a precursor stage to real estate PF. Bridge loans offer high interest rates and good profitability, but they also carry high default risk.
An official at the Financial Services Commission (FSC) said, "We are coordinating the council schedule with the institutions that hold supervisory authority over mutual finance institutions while also discussing the agenda," and added, "We are in talks to include the setting of a PF loan cap for mutual finance institutions on the agenda."