The financial authorities will draw up improvement measures, such as tightening joint loan reviews in mutual finance institutions and institutionalizing related best practice standards. A joint loan in mutual finance institutions refers to a loan handled jointly by two or more cooperatives. In recent years, local cooperatives aggressively increased joint loans for real estate project financing (PF) and construction and real estate, and the bad debt has grown.
According to the financial sector on the 27th, the financial authorities plan to discuss ways to strengthen joint loan review standards in mutual finance institutions through the Mutual Finance Council. The financial authorities said it is necessary to ease the concentration of high-risk loans such as real estate PF in mutual finance institutions and to strengthen standards for joint loan review and handling.
The financial authorities are reviewing a plan to separate real estate PF loans from among joint loans in mutual finance institutions and manage them separately. They also plan to promote institutionalizing the joint loan handling standards, which are currently set as best practice standards, into supervisory regulations. The best practice standards set the joint loan limit at 15% of total credit, and the loan limit for joint loans by industry at one-third of the outstanding loan balance of joint loans for real estate and construction, respectively.
They are also reviewing measures to strengthen pre-screening for joint loans. Currently, when a regional cooperative handles a joint loan above a certain amount, it must undergo pre-screening by the central association. The purpose is to strengthen this screening standard to prevent loan delinquencies in advance.
Joint loans are being cited as one of the causes of bad debt in mutual finance institutions. Regional-level NongHyup cooperatives are representative. Individual NongHyup cooperatives cannot lend more than 5 billion won to the same borrower, and to avoid this, several regional cooperatives are handling real estate loans as joint loans. They mainly handle bridge loans used as funds for land purchases ahead of real estate PF.
As of the end of Aug., the joint loan delinquency rate in NongHyup mutual finance institutions was 19.23%. The joint loan delinquency rate surged from 1.25% in 2021 and 1.88% in 2022 to 7.41% in 2023 and 13.62% last year. During this period, the delinquency rate for commercial facility collateral loans jumped to 28.43%, and the delinquency rate for joint loans secured by land collateral, among others, rose sharply to 23.47%.