The Financial Services Commission (FSC) is considering applying the real estate project financing (PF) "20% rule" to mutual finance institutions as well. The "20% rule" means a system under which lenders can make loans only to developers that cover 20% or more of PF project funds with their own capital. It is currently applied only to savings banks. If implemented, it appears likely to apply directly to the Korean Federation of Community Credit Cooperatives (KFCC), which has effectively been the only institution within mutual finance institutions handling PF loans for real estate development (main PF).
According to the financial industry on the 6th, the Financial Services Commission (FSC) plans to discuss a regulatory plan to apply the real estate PF 20% rule to mutual finance institutions 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) at the "second 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 forest cooperatives, and the Ministry of the Interior and Safety (MOIS) has supervisory authority over the Korean Federation of Community Credit Cooperatives (KFCC). Only credit unions are supervised by the Financial Services Commission (FSC).
Real estate PF is an investment method in which developers borrow development funds with pre-sale revenue as collateral. Korea's real estate PF market grew rapidly between 2020 and 2022 due to factors such as increased supply during the process of overcoming COVID-19, but business conditions deteriorated sharply from the second half of 2022. As developers failed to properly repay principal and interest on loans, the soundness of the lending financial institutions also worsened.
Under current rules, savings banks can extend real estate PF loans only to projects in which developers cover 20% or more of real estate development funds with their own capital. This is to prevent developers with little own capital from easily going bankrupt if a project fails and shifting losses onto savings banks. If this proposal moves forward, mutual finance institutions would also be able to handle PF loans only for developers that meet the own-capital requirement.
The regulation appears likely to apply directly to the Korean Federation of Community Credit Cooperatives (KFCC) among mutual finance institutions. Mutual finance institutions are barred from main PF loans under Financial Supervisory Service rules. However, the Korean Federation of Community Credit Cooperatives (KFCC) established central-level rules and offered a product called "managed land trust project expense loan," the only product among financial firms at the time to handle loans in a package form from bridge loans (land acquisition stage PF) through main PF loans. Because of this, a significant portion of exposure (risk-weighted assets) within mutual finance institutions is known to be related to the Korean Federation of Community Credit Cooperatives (KFCC).
Mutual finance institutions' soundness indicators have recently deteriorated due to loans related to real estate PF. As of the end of 2022, the delinquency rates at regional NongHyup, fisheries cooperatives, and forest cooperatives were 1.21% to 2%. However, in the first half of this year, they surged to 5.07% for NongHyup, 8.11% for fisheries cooperatives, and 7.46% for forest cooperatives. 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) was around 2% through 2021, but jumped to 8.37% in the first half of this year.
In Nov. last year, the government held a meeting of economy-related ministers and said it would "consider introducing an own-capital-to-project-cost ratio requirement, similar to savings banks, for mutual finance institutions, specialized credit finance companies, and the Korean Federation of Community Credit Cooperatives (KFCC), which lack a risk management framework." The review was delayed for some time due to issues such as the presidential election and a reorganization of the financial authorities, but it is known to be back on the table at this council.
An official at the Financial Services Commission (FSC) said, "We are reviewing applying the regulation to manage soundness across mutual finance institutions," and noted, "It is expected to have a greater impact on financial institutions with relatively higher levels of exposure."