"Next Year, Growth of Mutual Finance and Savings Banks Limited... Credit Finance Sector Also Clouded"

Due to the real estate market downturn and rising corporate loan delinquency rates, it is anticipated that the growth and profitability of non-bank deposit-taking institutions such as mutual finance and savings banks will be limited next year. Additionally, the prolonged high-interest-rate environment is expected to lead to profitability decline and increased delinquency rates in the credit finance sector.

Juntae Park and Taerok Oh, research fellows at the Korea Institute of Finance, stated this during their presentation titled "Trends and Outlook of Non-bank Deposit-taking Institutions and Specialized Credit Finance Businesses" at the 2023 Financial Trends and 2024 Outlook Seminar held on the 7th at the Bankers' Hall in Jung-gu, Seoul.

According to Research Fellow Park, non-bank deposit-taking institutions are expected to face difficulties in terms of growth and profitability next year. This is due to the prolonged real estate market downturn, increased corporate loan delinquency rates, and a decrease in new loans, which in turn is expected to increase the demand for provisioning.

Park explained, "Non-bank deposit-taking institutions need to maintain soundness next year while also strengthening links with policy-based financial products for low-income households, requiring careful consideration of supply measures for inclusive finance."

Accordingly, mutual finance institutions (agricultural and fisheries cooperatives, credit unions, Saemaeul Geumgo) are expected to prepare for possible changes in the policy environment next year by resolving regulatory arbitrage, enhancing consumer protection, and strengthening internal controls as part of their management strategies.

Park noted, "Regulatory arbitrage and insufficient internal controls within the mutual finance sector appear to have caused an expansion of real estate loans and related defaults, highlighting the need for related institutional improvements. Considering that the main customers of mutual finance are low-income households, efforts to strengthen consumer protection are also necessary."

For savings banks, advice was given to build a balanced portfolio that meets the demand for inclusive finance while avoiding excessive increases in high-risk assets. In particular, since the credit quality of small unsecured loans, which have a high proportion of low-credit and multiple debtors, is deteriorating, asset portfolio composition should take this into account.

The credit finance sector is also predicted to continue experiencing profitability declines and rising delinquency rates due to the prolonged high-interest-rate environment. In the card industry, the increase in marginal borrowers and the slowdown in private consumption are expected to lead to asset deterioration in loan-type assets and a contraction in profitability in the credit sales sector.

Research Fellow Oh stated, "Since borrowers' repayment ability is generally expected to be lower than this year, there is a possibility of qualitative deterioration in loan and installment finance assets. With limited growth in card sales and expected increases in funding and bad debt costs, whether operating expenses can be reduced will be a key factor affecting the profitability of credit sales."

For non-card credit finance businesses such as capital companies, growth and soundness are expected to vary by company depending on their asset portfolios. Capital companies with a high proportion of retail finance core businesses are expected to maintain this year's growth level, but small and medium-sized companies with a high proportion of real estate project financing (PF) loans may face deferred and accumulated PF loan defaults, making soundness and liquidity management more important than this year.