Mutual Finance Real Estate PF Loan Reserve Requirement Ratio to Increase by 30%

Gradual Implementation Until June Next Year

The loan loss provision rates for real estate project financing (PF) related to the mutual finance sector (credit cooperatives, agricultural cooperatives, fisheries cooperatives, forestry cooperatives, and central associations) will be increased by 30%. This is to enhance the loss absorption capacity for exposures related to construction and real estate industries and to strengthen soundness management.

On the afternoon of the 21st, the Financial Services Commission announced that it had approved the "Partial Amendment to the Mutual Finance Business Supervision Regulations" containing these details at the 3rd regular meeting held at the Government Seoul Office in Jongno-gu, Seoul.

Taeyoung Construction, experiencing a liquidity crisis due to real estate project financing (PF), has applied for workout, and on the 5th, the construction site of Taeyoung Construction's Seongsu-dong development project located in Seongdong-gu, Seoul, has come to a halt. Photo by Kang Jin-hyung aymsdream@

Currently, the mutual finance sector applies strengthened loan loss provision rates for construction and real estate loans compared to general corporate loans. For construction and real estate loans classified as ‘normal,’ 1% is applied; for ‘precautionary,’ 10%; for ‘substandard,’ 20%; for ‘doubtful,’ 55%; and for ‘estimated loss,’ 100%.

However, this amendment to the supervision regulations increases the loan loss provision rates for construction and real estate loans in the mutual finance sector by 30% compared to the existing rates. For ‘normal’ construction and real estate loans, 1.3% will be applied; for ‘precautionary,’ 13%; for ‘substandard,’ 26%; for ‘doubtful,’ 71.5%; and for ‘estimated loss,’ 130%. This level corresponds to the loan loss provision rates for PF loans of savings banks and specialized credit finance companies.

Meanwhile, although this amendment will take effect immediately after promulgation, considering market conditions and industry burdens, the provision rates will be applied in stages: 110% until June 30, 120% until December 31, and 130% until June 30 of next year.