Financial Authorities Tighten Joint Real Estate Loans in Mutual Finance Sector

Strengthening Credit Screening for Joint Loans
Applying Concentration Loan Prevention Measures to Mutual Finance

[Asia Economy Reporter Kim Hyo-jin] The government has decided to apply soundness regulations to mutual finance sectors such as credit unions, Saemaeul Geumgo, and agricultural and livestock cooperatives to prevent excessive concentration of funds. This decision comes amid concerns over increased delinquency rates and growing soundness risks in the mutual finance sector.

On the 1st, the Financial Services Commission held an online Mutual Finance Policy Council meeting with related ministries including the Ministry of Economy and Finance, Ministry of the Interior and Safety, Ministry of Agriculture, Food and Rural Affairs, and Ministry of Oceans and Fisheries to discuss these measures.

According to financial authorities, the delinquency rate in the mutual finance sector rose from 1.33% in 2018 to 1.75% in 2019, and 2.14% as of June 2020. The ratio of non-performing loans also increased from 1.58% in 2018 to 2.08% in 2019, and 2.42% in mid-2020.

The authorities particularly note that local cooperatives are rapidly increasing joint loans centered on real estate-related industries, which is raising risk levels. The delinquency rate for real estate-related industries rose from 1.99% at the end of 2018 and 2.72% at the end of 2019 to 2.97% as of the end of September this year.

Furthermore, the Financial Services Commission observes that the National Mutual Finance Federation is expanding the proportion of alternative investments such as derivative-linked products and social overhead capital (SOC) in asset management, necessitating management of potential losses.

Accordingly, financial authorities plan to encourage cooperatives to strengthen their own credit screening and the Federation’s guidance and supervision when handling joint loans, and to have the Federation establish guidelines for alternative investments. A new 'Alternative Investment Business Report' will also be introduced for high-risk investments such as alternative investments.

The authorities also warn that if funds concentrate excessively in the mutual finance sector due to overly relaxed soundness regulations compared to other sectors, it could pose a risk to the financial system. Additionally, as regulatory differences among institutions within the mutual finance sector have raised concerns about unfair competition, measures will be introduced to eliminate regulatory disparities between the mutual finance sector and other sectors, as well as within the sector itself.

The existing large loan concentration prevention system applied to savings banks will be extended to the mutual finance sector. This defines large loans as those exceeding 10% of an institution’s own capital, and limits the total amount of large loans to no more than five times the institution’s own capital.

Loans to Real Estate and Construction Sectors Limited to 50% or Less

Industry-specific regulations will also be introduced to ensure that loans to the real estate and construction sectors do not exceed 30% of total loans each. The combined loan amount to these two sectors must not exceed half of total loans.

Liquidity ratio regulations will be introduced as well. Institutions must maintain a ratio of liquidity assets (cash, deposits, etc.) to liquidity liabilities (savings deposits, borrowings) with remaining maturity within three months at 100% or higher.

To reduce regulatory differences among institutions, systems such as repayment reserves and cooperative dividend systems will also be revised.

To align the mandatory deposit ratio of repayment reserves at the Federation with that of agricultural, fisheries, and forestry cooperatives, which is set at 100%, the authorities are considering raising the mandatory deposit ratio for credit unions and Saemaeul Geumgo from 50% to 80%. For credit unions, the standard articles of association will be revised to specify the dividend cap for individual credit unions.

The Financial Services Commission also plans to promote legislation to expand consumer protection coverage, addressing the current situation where only credit unions are subject to the Financial Consumer Protection Act while other mutual finance institutions are excluded due to the unique supervisory system.