[농협금융2.0]③ Nonghyup Bank and Other Nongchukhyup... Between Local Engagement and Collusion

Mutual Finance Business Handled by Nongchuk Cooperative (Secondary Finance)
Different from Nonghyup Bank (Primary Finance) under Nonghyup Financial Group
Meaningful as Community-Based Financial Service
Cases of Illegal Loans Linked to Local Officials
Issue: Weakened Competitiveness... Also Competing with Nonghyup Bank
Increased Losses in Nonghyup Central Association Special Account as 'Central Bank' Role

In 2012, the National Agricultural Cooperative Federation (NACF) was split through business separation (separating credit business and economic business) into NACF Financial Group, which conducts financial business, and NACF Economic Group, which handles economic business. The current system of ‘1 Central Federation - 2 Holding Companies’ with two holding companies under the Central Federation has continued to this day. Even after the business separation, the mutual finance business, which has been ongoing since the establishment of NACF, continues to be conducted by regional agricultural cooperatives composed of members. This is a separate organization from NACF Bank, a first-tier financial subsidiary of the Central Federation, and operates as a second-tier financial institution closely connected to the region, handling both second-tier financial services and NACF’s economic business. However, intensified regional collusion has led to financial accidents and crises due to competition with NACF Bank. It is now necessary to find ways to revive the meaning of regionally embedded finance.

The mutual finance business of regional agricultural cooperatives, established based on farmers’ cooperatives, aims to provide agricultural financial services in rural areas, benefit members, and activate finance for ordinary citizens. It operates 3,705 branches centered on 1,111 agricultural cooperatives nationwide. Specifically, it supports farming and household funds for stable agricultural management, acts as a bridge between rural and urban cooperatives, offers customized financial products, and promotes mutual finance special account projects for members.

Regional agricultural cooperatives leverage their knowledge of the region or rural areas to provide practical financial services to farmers or local residents. A financial sector official stated, “Because they know the local circumstances intimately, they can conduct loan screenings more properly,” adding, “This is because they can reflect not only quantitative criteria but also many qualitative factors.” However, financial accidents continue to occur as close ties with local residents sometimes turn into collusive relationships, leading to ‘biased’ lending. In November last year, it was revealed that Executive Director A, in charge of loan operations at Yeoju Daesin Agricultural Cooperative, bypassed internal appraisal regulations and funneled work to a specific corporation while lending about 1.1 billion KRW to three companies and an individual B. Loans exceeding the actual transaction price on the sales contract were processed.

Currently, the competitiveness of mutual finance in agricultural cooperatives is weakening. As of the end of last year, the non-performing loans (NPLs) of 1,117 domestic agricultural cooperatives amounted to 10.7754 trillion KRW. This is the first time since 2011 that it has exceeded 10 trillion KRW and is the highest amount ever recorded. NPLs refer to loans overdue by more than three months among financial institutions’ loans. Although the loan amounts handled by NACF mutual finance are smaller than those of commercial banks, the NPLs are significantly higher compared to first-tier banks. Even considering that second-tier financial institutions handle more loans to medium- and low-credit borrowers than first-tier institutions, there is criticism about the high level of NPLs. The total credit handled by agricultural cooperatives was 357.6607 trillion KRW as of last year. The total credit and NPLs of 20 domestic banks were 2,259.361 trillion KRW and 23.4976 trillion KRW, respectively. In other words, NACF handles only 16% of the total loans of the 20 banks but accounts for half of their combined NPLs.

Since the business separation, competition has also arisen between regional agricultural cooperatives and NACF Bank over financial services for farmers. NACF Bank has opened branches even at the county level, causing overlapping operations. The difference between NACF Bank and agricultural cooperatives is that the bank can perform detailed and specialized tasks such as foreign exchange and funds, while general deposit and loan services are available at both. As of the end of last year, NACF Bank had 1,110 branches. The number of agricultural cooperative corporations is 1,111, with 3,705 branches. From the perspective of financial consumers, it is difficult to distinguish between the two companies externally. The signboards differ only in that regional agricultural cooperatives display NH Nonghyup, while NACF Bank shows NH Nonghyup ‘Bank’. Aware of this, Kang Ho-dong, Chairman of NACF, described the relationship between agricultural cooperatives and NACF Financial as one of selective competition while cooperating externally, stating, “It is desirable for NACF Bank to enhance business competitiveness centered on the metropolitan area and large cities, while agricultural cooperatives expand their regional financial base.”

The reason NACF Bank opens branches even at the county level is that there is a difference between first- and second-tier financial services, and commercial banks do not open branches at the county level, so NACF Bank provides first-tier financial services to farmers. Of NACF Bank’s total branches, 704 are located outside the metropolitan area of Seoul, Gyeonggi, and Incheon, accounting for 63%. This is more branches in local areas compared to Kookmin Bank (36%), Shinhan Bank (29%), Woori Bank (24%), and Hana Bank (37%).

There is also the issue of losses in the special account that receives money from regional agricultural cooperatives, generates profits, and returns them. The deposit insurance premiums and surplus funds of regional agricultural cooperatives are collected and managed by the NACF Central Federation’s mutual finance division. When profits are generated from the managed funds, they are returned to the regional agricultural cooperatives, functioning as a central bank for them. However, the special account managing the funds of regional agricultural cooperatives recorded a loss of 557 billion KRW last year.

The NACF Central Federation’s mutual finance division has entered an emergency management system and is making self-help efforts. On the 18th, the ‘Emergency Management Countermeasures Committee’ was established, and four task forces (TFs) were set up: agricultural cooperative delinquency management, special account profitability improvement, mutual finance independence promotion, and deregulation of agricultural cooperative credit business.

Editor's NoteThe National Agricultural Cooperative Federation, established for the development of Korean farmers, has passed 12 years since the business separation (separating credit and economic businesses). The separated credit business has transformed into NACF Financial Group and is growing with the goal of becoming a global financial group. However, voices are growing that the unique governance structure, in which NACF Central Federation holds 100% of the shares, is causing various problems such as financial accidents, agricultural support project expenses, personnel systems, and weakening competitiveness of agricultural cooperative mutual finance. This article revisits recent controversies surrounding NACF Financial Group and the mutual finance business and explores the direction NACF Financial should take. If the business separation was version 1.0 of NACF Financial’s development, it is now time to create a version 2.0 blueprint and improve systems and institutions for NACF Financial to take a further leap forward.