[Exclusive] Capital Impairment Persists Even After Merging with Sound Cooperatives... A Look at the Top 50 by Total Assets

Six Large Cooperatives Fall into Partial Capital Impairment
Begin Using Members' Capital Contributions Due to Lack of Profits
One Newly Merged Cooperative Enters Capital Impairment in Its First Year
31 Cooperatives Record Net Losses, Accounting for 62%
18 Cooperatives Shift to Deficits
"Mergers Alone Are Not the Solution"

As 1,276 Saemaul Geumgo cooperatives across the country recorded a historic maximum loss of nearly 2 trillion won last year, it has been revealed that some of the larger cooperatives by asset size have fallen into a state of capital impairment. Of these, half were not in a state of capital impairment the previous year but became so last year, and one cooperative that merged with an insolvent cooperative also entered capital impairment. This is a signal that even financially sound cooperatives are now facing management crises. As a result, there are criticisms that simply merging troubled cooperatives with nearby ones is no longer sufficient.

Six Cooperatives in Partial Capital Impairment, Half Were Sound in 2023?Includes Merged Cooperatives

According to an Asia Economy review of public disclosures for the top 50 cooperatives by total assets last year, six cooperatives fell into a state of partial capital impairment. Last year, Saemaul Geumgo posted a net loss of 1.7382 trillion won, the largest loss in its history. Among the top 50 cooperatives, half (25) are classified as large, each with more than 1 trillion won in total assets, yet even these large cooperatives saw their financial condition deteriorate.

Of the six, five are located in Gyeonggi Province and one in Daegu. Half of these were not in a state of capital impairment in 2023 but fell into it last year. One cooperative in Daegu, newly established through a merger last year for management rationalization, has been operating in a state of capital impairment from its first year. This indicates that even though the merger was carried out because the original cooperative was deemed unable to operate normally, the management condition remains poor.

Capital impairment refers to a situation where net assets are less than the paid-in capital. If losses continue and accumulated surplus funds are depleted, a company or bank starts to use its paid-in capital. In the case of Saemaul Geumgo, the capital is composed of contributions paid by members, so this means that as cooperatives fail to generate profits and face management difficulties, they have begun to use members’ capital contributions.

These cooperatives have also seen deterioration in capital adequacy and asset soundness. Saemaul Geumgo Federation evaluates the management status of individual cooperatives at the central level. Evaluations are conducted by category (capital adequacy, asset soundness, management capability, profitability, and liquidity), and each is graded, after which a comprehensive evaluation grade (from 1 to 5) is assigned. Both quantitative and qualitative assessments are considered, and each category is graded from 1 to 5, just like the comprehensive grade. Even if a cooperative receives a good comprehensive grade, if it receives a low grade (4 or 5) in capital adequacy or asset soundness, management improvement measures can be taken, making these categories particularly important in the evaluation.

According to our calculations, based on the quantitative evaluation criteria for these cooperatives, all but one received a lower grade in 2023 compared to the previous year. Looking into the details, the lowest grade, 5, was most frequently given for the net substandard loans ratio. According to supervisory standards, a grade 5 in this category is given when the ratio exceeds 9%. As a result, two out of the six capital-impaired cooperatives received a comprehensive grade of 4 in last year’s management evaluation. When a cooperative receives a grade 4, the Saemaul Geumgo Federation is required to demand management improvement from that cooperative. Measures such as mergers and restrictions on profit distribution can be taken, and a management improvement plan must be submitted to the Federation.

The Saemaul Geumgo Federation stated regarding these cooperatives, "Even if they are in partial capital impairment, all six cooperatives are maintaining a financial status with a net capital ratio exceeding the regulatory standard of 4% through capital contributions and other capital items," adding, "It is fully possible to resolve the impairment status through improvements in profit and loss structure going forward."

Net Losses and a Shift to Deficits... "Mergers Alone Are Not the Solution"

There were also 31 cooperatives that recorded net losses in current net profit, accounting for 62% of the top 50 cooperatives. Of these, more than half (18) had posted net profits in 2023 but shifted to net losses last year. For 44 out of the 50 cooperatives, results worsened compared to the previous year.

This trend signals that even cooperatives with a solid asset base are experiencing management deterioration. In response, the Saemaul Geumgo Federation has primarily attempted mergers with nearby cooperatives. Recently, the Federation announced that, following the bank run crisis in July 2023, it had completed the merger of 24 cooperatives. In particular, last year, the Cooperative Restructuring Headquarters was newly established to select cooperatives for merger based on criteria such as capital adequacy and asset soundness.

However, there is a view that mergers alone are not the answer, as some cooperatives have still fallen into capital impairment even after merging. Furthermore, there are concerns that, since there are no specific supervisory standards related to capital impairment, more robust soundness management of individual cooperatives is needed. The Saemaul Geumgo Federation maintains that, since capital impairment inevitably leads to a downgrade in management evaluation grades due to the deterioration in soundness, indirect corrective or supervisory action is possible. In cases of complete capital impairment, the Federation stated that such cooperatives can be included as targets for restructuring, with normalization pursued through mergers or management rationalization.