[농협금융2.0]④Conditions for Success Like Credia Agricole... IPO and Mutual Finance Strengthening

Based on the smallest unit local agricultural banks,
regional agricultural banks play a central role
No overlapping operations,
mutual checks and investments between federations and financial holding companies
Significant growth by accepting private capital through IPOs
Clues to issues in the scope of mutual finance operations exist

It has been 12 years since NongHyup Financial Group was separated from the National Agricultural Cooperative Federation (NACF) through institutional separation (separating credit business and economic business). Modeled after France's Cr?dit Agricole, the world's largest cooperative financial group, it has been growing steadily. However, voices are emerging that the governance structure between NACF and the financial holding company needs to be revised for NongHyup to become a global financial group like Cr?dit Agricole. Instead of NACF holding 100% of the shares, it is suggested to aim for both private sector oversight and capital acquisition through an initial public offering (IPO). The mutual finance sector also faces the challenge of strengthening its functions while resolving business overlaps with banks. However, there are concerns that if foreigners and small shareholders dominate the company, the fundamental purpose of NongHyup's establishment could be undermined, and strengthening mutual finance competitiveness might actually reduce financial expertise.

The logo of Cr?dit Agricole, France's largest cooperative financial group [Image source=Reuters Yonhap News]

Cr?dit Agricole has risen to become one of Europe's top financial institutions centered around cooperatives of farmers and local residents. It is evaluated as balancing agricultural policy finance responsibilities with competitiveness in general financial business, considering both farmers' and public interests.

Cr?dit Agricole started with local agricultural banks formed by cooperatives of regional farmers. According to Professor Kim Doo-nyeon of Jungwon University's Global Leadership Department in his study "A Study on Agricultural Policy Finance of French Agricultural Cooperative Banks," the lowest organizational unit of Cr?dit Agricole is the local agricultural bank (CALB). CALBs gather regionally to form regional agricultural banks (CARB). Initially, CALBs handled deposit and loan operations, but now CARBs perform loan screening or mediate financial products when lending to farmers and local residents. CALBs also manage cooperative members as basic organizations electing CARB delegates. CARBs perform deposit and loan functions within their jurisdiction like commercial banks and also sell investment financial products of Cr?dit Agricole S.A. (CASA) subsidiaries such as funds and insurance. CASA is a financial holding company that ensures CARB's sound management, develops integrated financial products, and manages subsidiaries.

The organization representing CARB externally is the F?d?ration Nationale du Cr?dit Agricole (FNCA). Through FNCA, CARB indirectly controls CASA by recommending supervisory directors. CARB does not directly handle deposits or loans; its subsidiaries conduct financial operations. CASA manages CARB's funds and financial risks and supervises internal controls over CARB. It also has the authority to appoint the CEO and can manage and supervise CARB if mismanagement occurs. CASA holds subsidiaries including investment companies, life insurance, non-life insurance, and securities firms. CASA went public in 2001 to acquire Cr?dit Lyonnais, which currently handles retail finance within the group. In 2008, CARB made additional investments, holding 54.8% of CASA shares, while individuals and institutional investors owned the remaining 45.2%. Leveraging abundant capital, CASA expanded into consumer finance, investment trusts, corporate finance, and other areas.

If this structure is applied to NACF and NongHyup Financial Group, CALB and CARB correspond to regional agricultural cooperatives, FNCA to NACF, and CASA to NongHyup Financial Group. There are three differences from Korea's NongHyup. Cr?dit Agricole operates banking centered on CALB and CARB. In contrast, NACF and NongHyup Financial Group subsidiaries, including NongHyup Bank, both engage in banking. The relationship between FNCA and CASA is complementary; FNCA, composed of CARBs, represents farmers' interests by recommending supervisory directors to CASA, which in turn manages and supervises CARB.

The shareholding structure is also cross-shareholding. CARB holds more than half (54.8%) of CASA's shares, and CASA owns 25% of CARB. Conversely, NACF owns 100% of NongHyup Financial Group, overseeing its entire management. NongHyup Financial Group has no authority to manage or supervise the mutual finance sector of NongHyup.

To further grow NongHyup Financial and develop it into a proper financial company, there is an opinion that NACF should maintain its major shareholder status while accepting private capital through an IPO. Similar to Cr?dit Agricole's case, NACF would retain the majority stake, and the remaining shares would be sold to external private capital. This would enable the provision of funds and policies aligned with shareholders' interests, allowing the financial group to fulfill its core financial role properly, while NACF as the major shareholder could also promote agricultural development, the fundamental purpose of NongHyup. However, concerns exist that an IPO could undermine NongHyup's fundamental purpose. A financial sector insider said, "Once listed, foreign capital and small shareholders will enter, making it difficult to continue agricultural finance as currently done. Shareholder dividends must be considered, and excessive profit pursuit could hinder policies that support agriculture."

The issue of overlapping business scopes between NongHyup Bank and regional agricultural cooperatives' mutual finance operations must also be resolved. Like Cr?dit Agricole, regional agricultural cooperatives could focus only on loan screening for community-based finance, while NongHyup Bank could perform actual banking operations. NACF might also need to separate the mutual finance sector and transfer the role of a mutual finance central bank to NongHyup Financial Group or an independent corporation.

Among these, promoting mutual finance independence is a policy Chairman Kang pledged during his candidacy to strengthen mutual finance. The plan is to launch the mutual finance sector, currently a part of NACF, as an independent corporation to enhance expertise and strengthen its role as a profit center financially supporting regional agricultural cooperatives. This is expected to boost the competitiveness of regional agricultural cooperatives.

However, if the mutual finance sector becomes independent, there is concern that its business scope will overlap more with NongHyup Bank, making competition inevitable. If an independent mutual finance corporation is established, regional agricultural cooperatives would join under this corporation, intensifying its character as a "central bank" compared to when it was part of NACF. Some analyses suggest that independence could reduce the financial expertise of mutual finance employees. Under the current structure, personnel from financial subsidiaries such as banks and insurance companies transfer to NACF's mutual finance sector, sharing know-how and enhancing expertise. However, if separated into a corporation, personnel movement would be difficult, losing such synergy effects.

Editor's NoteNongHyup, established for the development of South Korean farmers, has been institutionally separated (separating credit and economic businesses) for 12 years. The separated credit business transformed into NongHyup Financial Group, aiming to become a global financial group. However, the unique governance structure where NACF holds 100% of shares is increasingly criticized for causing various problems such as financial accidents, agricultural support project costs, personnel systems, and weakening competitiveness of agricultural cooperatives' mutual finance. This article reviews recent controversies surrounding NongHyup Financial Group and mutual finance business and explores the direction NongHyup Financial should take. If the institutional separation of NongHyup was version 1.0 of its financial development, it is now time to create a version 2.0 blueprint and improve systems and institutions for NongHyup Financial to leap forward.