FSC Announces Mutual Finance System Reforms... Introduces New PF Loan Limits

2nd Mutual Finance Policy Council Held
PF Loan Limit Set at 20% of Total Loans
110% Risk Weight Applied to Real Estate Loans in Net Capital Ratio Calculation
Soundness Management Measures Announced for Central Federations and Cooperatives

Financial authorities will strengthen real estate and construction loan regulations for mutual finance institutions to the level applied to savings banks. The risk weight for real estate-related loans will be significantly increased when calculating the net capital ratio, a key indicator of soundness for mutual finance institutions. The intention is to encourage these institutions to improve their loan portfolios and expand credit supply to local communities and low-income individuals. In addition, new measures focusing on soundness management by central federations and cooperatives have been introduced.

On December 22, the Financial Services Commission held the '2nd Mutual Finance Policy Council' chaired by Vice Chairman Kwon Daeyoung and announced these institutional improvement measures. The commission stated, "These measures are aimed at enhancing the risk management capabilities and loss absorption capacity of central federations and cooperatives, providing incentives to shift loan practices from real estate collateral-based lending to a more community- and low-income-focused approach, and improving cooperative governance and internal control systems."

Announcement of Measures Focused on Soundness Management, Including New PF Loan Regulations

The financial authorities will tighten regulations to address the concentration of real estate and collateral-based lending practices among mutual finance cooperatives. A new limit will be set for project financing (PF) loans, restricting them to 20% of total loans. Furthermore, the combined share of PF, real estate, and construction loans must not exceed 50% of total loans for mutual finance institutions. A risk weight of 110% will also be applied to real estate and construction loans when calculating the net capital ratio. The authorities may take prompt corrective actions, requiring appropriate management improvements from financial companies if capital adequacy indicators suggest potential insolvency. By increasing the regulatory burden on real estate-related loans in the net capital ratio-one of the criteria for implementing such corrective actions-the aim is to enhance the soundness of cooperative asset portfolios.

For joint loans related to large-scale real estate development, requirements such as mandatory prior review by the central federation will be strengthened. Model guidelines for PF business feasibility assessments will be established to systematize PF risk management. In addition, criteria for estimating the recoverable value of distressed assets will be revised to facilitate the resolution of long-standing non-performing PF projects.

However, the authorities have decided to defer the increase in loan loss reserve ratios for real estate and construction loans, which is part of the soundness enhancement measures. Previously, mutual finance institutions were required to raise the reserve ratio for real estate and construction loans from 120% to 130% by December 31, but this deadline has been extended to March 31 of next year. Vice Chairman Kwon Daeyoung explained, "Given concerns that raising the reserve ratio could restrict financial supply to local communities, low-income individuals, and small business owners, we have granted an additional three months as the final implementation period in consideration of industry requests for a deferral."

The Financial Services Commission also announced measures to enhance the risk management capabilities of central federations. The minimum management guidance ratio (capital adequacy ratio) for central federations will be gradually raised to 7%, the same level as savings banks. The classification of alternative investments such as real estate funds will be made mandatory, and new approval procedures and limits will be established.

Through these improvements, the commission aims to strengthen the soundness management of individual cooperatives and expand their loss absorption capacity. The minimum net capital ratio for credit unions, fisheries cooperatives, and forestry cooperatives will be gradually raised to 4%. The 'management improvement order' system will be introduced for credit unions, bringing them in line with other mutual finance institutions. The 'large exposure limit regulation' will be codified to prevent excessive lending to specific borrowers, and the entire internal control system for loan operations will be strengthened, including computerized management of the loan process to prevent improper or fraudulent lending.

Additionally, measures will be taken to prevent misconduct by cooperative heads and to strengthen oversight of management by improving cooperative governance and expanding internal control systems. Eligibility requirements for executives will be tightened to the level stipulated in the 'Act on Corporate Governance of Financial Companies,' providing safeguards against improper long-term tenure by cooperative heads. The existing requirements for external audits and the appointment of standing auditors will be strengthened, and key principles of the 'Financial Consumer Protection Act' will be incorporated into internal regulations to better protect users of mutual finance institutions.

Authorities and Related Agencies: "Stable Management of Delinquency Rates, Expansion of Social Solidarity Finance Supply"

Meanwhile, the financial authorities reviewed the soundness and liquidity status of each mutual finance institution. The review found that, due to the downturn in the real estate market, delinquency rates and profitability in the mutual finance sector have deteriorated. The authorities plan to manage delinquency rates stably by selling off non-performing assets by the end of the year. For social solidarity finance, which supplies funds to social enterprises and cooperatives, performance has been lackluster, so measures to expand supply will be explored.

Vice Chairman Kwon Daeyoung stated, "These institutional improvement measures require a strong overhaul of the mutual finance sector and impose a significant level of responsibility and burden on both cooperatives and central federations. However, they are essential for the stability of the financial system and the sustainable development of the mutual finance sector. Each cooperative should diligently fulfill the additional reserve requirements within the extended period, and central federations should thoroughly monitor and support the implementation status of each cooperative to ensure the measures are carried out without delay."