The regional deposit base of mutual finance institutions, which grew on the strength of rural and small-city communities, is weakening. As the population declines and a stock-investing boom takes hold, large amounts of funds have shifted into investment-type financial products.
According to the Economic Statistics System (ECOS) of the Bank of Korea on the 15th, the share of non-capital regions—excluding Seoul, Incheon, and Gyeonggi—in the total deposits (savings and installment savings, etc.) of credit unions, mutual finance institutions (local agricultural cooperatives and fisheries cooperatives, and forestry cooperatives), and the Korean Federation of Community Credit Cooperatives (KFCC) has steadily declined over the past 10 years.
The non-capital region share for credit unions (based on end-of-month balances) fell from 69.9% in Feb. 2016 to 68.2% in Feb. 2021 and dropped further to 66.1% in Feb. this year. The Korean Federation of Community Credit Cooperatives (KFCC) also declined over this period from 61.9%→55.9%→54.8%.
By region, the declines in South Gyeongsang and North Gyeongsang were notable. For credit unions, the deposit share in South Gyeongsang fell 0.9 percentage point (p) over the past 10 years, the largest drop, followed by North Gyeongsang (-0.6 p). Mutual finance institutions also saw sharp decreases in South Gyeongsang (1.3 p) and North Gyeongsang (1.1 p). The Korean Federation of Community Credit Cooperatives (KFCC) likewise recorded the steepest drops in North Gyeongsang (-1.6 p) and South Gyeongsang (-1.4 p).
The biggest reason for the deposit decline is demographic change. The non-capital region population share fell from 50.5% in 2016 to about 49% last year. Still, some analysis says it is hard to attribute it to population decrease alone. In the past, regional funds naturally flowed into mutual finance institutions, but recently, as demand for investing in stocks and exchange-traded funds (ETFs) has grown, money is moving from savings and installment savings to trusts and other investment products. Critics note that mutual finance institutions, which have relatively low returns, have not responded well to this shifting trend.
Banks, insurers, and securities firms are expanding their trust businesses in non-capital regions. The non-capital share of total trust deposits rose from 16.1% in Feb. 2016 to 18.3% in Feb. this year. Even in North Gyeongsang and South Gyeongsang—where the share of mutual finance institution deposits shrank particularly sharply—the shares of trust deposits expanded by 0.2 p and 0.4 p, respectively.
Some also say trust in mutual finance institutions is not what it used to be, as a slowdown in regional real estate and concerns over project financing (PF) insolvencies overlap. In particular, as PF insolvency issues have surfaced around small and mid-sized regional business sites, anxiety toward local financial institutions has grown, critics say.
An industry source said, "In the past, regional funds naturally flowed into local mutual finance institutions, but now customers weigh returns and stability at the same time, and the flow of funds has changed," adding, "It has become difficult to retain customers on a regional base alone."