Chairman of National Credit Union Federation Summoned to Audit... Will He Speak Out? [1mm Finance Talk]

Financial Soundness and Internal Control Issues Under Scrutiny
Regulatory Blind Spots and Ongoing Controversies
Mutual Finance Sector’s Role Likely to Be Reexamined

Kim In, chairman of the National Credit Union Federation of Korea, appearing as a witness at the National Assembly's Public Administration and Security Committee's audit of the Ministry of the Interior and Safety and the Ministry of Personnel Management on October 7 last year.

As the National Assembly audit season opens, the National Policy Committee is drawing attention by summoning the heads of mutual finance associations. Although the mutual finance sector has grown significantly, oversight is fragmented across different supervisory bodies, resulting in less scrutiny from the committee compared to the banking sector. However, in recent years, the mutual finance sector has faced continuous controversies, including deteriorating financial soundness and inadequate internal controls, which have brought it to the forefront of this year's audit by the National Policy Committee.

According to the committee on the 14th, Kim In, chairman of the National Credit Union Federation of Korea, and Kim Yoon-sik, chairman of the National Federation of Community Credit Cooperatives, have been selected as witnesses for the audit of the Financial Supervisory Service scheduled for the 21st. As of now, it is highly likely that they will appear in person. However, since there is still a week left until the audit, there is a possibility that the witness list may be partially adjusted.

The committee is expected to focus on issues of deteriorating soundness and insufficient internal controls within the mutual finance sector. In particular, it is likely to demand measures related to non-performing real estate project financing loans. As of the first half of this year, the delinquency rate for land-backed loans handled by secondary financial institutions, including mutual finance associations, reached 30%.

Questions will also be raised regarding opaque mergers and out-of-region loans at the National Credit Union Federation of Korea. Although the federation promised organization-wide reforms after the bank run crisis, many individual cooperatives continue to operate haphazardly, failing to properly disclose information related to mergers. (See the exclusive report published on October 9: [Exclusive] "Despite Promising Innovation" 3 Out of 10 Credit Unions Conduct Opaque Mergers)

Over the past five years, credit unions nationwide have issued more than 37 trillion won in out-of-region loans. Excessive out-of-region lending poses risks, as it is difficult to accurately assess local economic conditions and risks, which can lead to non-performing loans.

For the National Federation of Community Credit Cooperatives, the main focus will likely be on inadequate internal controls. There was a recent case in which an employee was sentenced to prison on appeal for embezzling 1.5 billion won in customer deposits over more than 20 years. Additionally, there has been controversy over so-called "luxury business trips," where regional credit union chairpersons, who are elected by member contributions, claimed excessive per diem expenses.

In relation to this, an official from the National Policy Committee stated, "Amid the recent economic downturn, as more medium- and low-credit borrowers are unable to use primary financial institutions, the role of mutual finance associations has grown, but transparency and accountability remain seriously lacking. There is a need to address these issues through this audit."