Going forward, mutual finance institutions may handle real estate project financing (PF) loans only within 20% of total loans. If an executive of a mutual finance company receives a reprimand warning or higher sanction from the financial authorities, the person cannot become an executive of another cooperative or credit union for at least three years.
The Financial Services Commission (FSC) held the "mutual finance policy council" at the Government Complex Seoul on the 22nd, chaired by Vice Chair Kwon Dae-young, and finalized the "institutional improvement plan for mutual finance institutions."
According to the improvement plan, regulations on real estate-related loans by mutual finance institutions, such as real estate PF loans and syndicated loans, will be strengthened. When calculating the net capital ratio, a 110% risk weight will be applied to loans to the real estate and construction sectors, and the loan limit for PF loans will be capped at 20% of total loans. For syndicated loans related to large-scale real estate development, requirements will be tightened, including making prior review by the central association mandatory. A "PF loan best-practice code" will be newly established to systematize risk management for related loans. To facilitate the resolution of long-standing unresolved insolvent PF business sites, the criteria for estimating the recovery value of insolvent asset will be improved.
By legislating the "large-exposure loan limit regulation," the plan will prevent loan concentration to specific borrowers, and it will also improve the credit extension process to prevent improper and false loans.
The management guidance ratio (capital adequacy ratio) standard for the mutual finance central associations will be raised in stages to 7%, the level of savings banks. Currently, the management guidance ratio is 2% for NongHyup, the National Federation of Fisheries Cooperatives, and the National Forestry Cooperatives Federation, and 5% for credit unions and the Korean Federation of Community Credit Cooperatives (KFCC).
They will mandate prudential classification for the central associations' alternative investments, such as real estate funds and private equity funds, and establish approval procedures and limits. When a central association makes an alternative investment, it must report to the board of directors. They will also strengthen liquidity risk management by improving how liquidity indicators are calculated for the central associations and cooperatives.
The minimum net capital ratio standard for credit unions, the National Federation of Fisheries Cooperatives, and the National Forestry Cooperatives Federation will be raised gradually from the current 2% to 4%. A management improvement order system will be introduced at credit unions to enhance the effectiveness of restructuring. A management improvement order is the highest-level warning among prompt corrective actions that the financial authorities issue to financial companies whose financial soundness has deteriorated below certain standards.
To prevent misconduct by cooperative heads and management, the eligibility requirements for cooperative executives will be strengthened to the level of the Act on Corporate Governance of Financial Companies. Under the governance act, if a person receives sanctions such as dismissal, suspension from duty, or a reprimand warning from the financial authorities, the person cannot serve as an executive of a financial company for a certain period. The periods are five years for dismissal, four years for suspension, and three years for a reprimand warning. Mutual finance institutions were not subject to the governance act.
They also put in place a device to prevent the cooperative head's de facto long-term tenure and required that major principles under the Financial Consumer Protection Act be reflected in internal rules.
The Financial Services Commission (FSC) decided to grant a three-month deferral of the planned year-end increase to 130% in the provisioning rate for construction and real estate sectors in mutual finance institutions. Mutual finance institutions had requested a six-month deferral of the increase in the provisioning rate, arguing that a higher burden of provisions would weaken cooperatives' financial capacity and lead to reduced returns to local communities.
At the meeting, Vice Chair Kwon said, "So far, mutual finance institutions have relied excessively on nonproductive areas, increasing corporate loans related to real estate by as much as 12 times solely for revenue and external growth," adding, "Mutual finance institutions must move away from a real estate- and collateral-centered approach and be reborn as financial institutions that truly help local and low-income economies."