Mutual Financial Institutions to Curb Inflation of Long-term Delinquent Real Estate PF Recovery Values... PF Loans Capped at 20%

Financial Services Commission to Revise Supervisory Regulations for Mutual Financial Institutions
Land Delinquent for Over Three Months to Have Expected Recovery Amount Calculated Based on Officially Assessed Value

Going forward, mutual financial institutions will be required to calculate the expected recovery amount for non-performing loans, such as long-term delinquent real estate project financing (PF) loans, based on conservative criteria such as the officially assessed land value. In addition, the limit for real estate PF loans will be restricted to 20% of total loans.

On March 2, the Financial Services Commission announced that it will conduct a pre-announcement of regulatory changes to the supervisory regulations for mutual financial institutions that reflect these measures.

This amendment focuses on revising the calculation system to prevent the inflation of expected recovery amounts for non-performing loans. For long-term non-performing real estate PF loans classified as "substandard or below" credits with more than three months of delinquency, the final collateral appraisal value will generally not be recognized in calculating the expected recovery amount. However, a single exception will be allowed if legal proceedings are initiated within three months.

Even if the collateral ratio exceeds 150%, unless there are specific exceptional circumstances, the expected recovery amount must be calculated according to the general standard. In particular, for land, conservative criteria such as the officially assessed land value will be applied.

To prevent a concentration of high-risk real estate PF loans, a regulation will be introduced from April 2027 that limits such loans to within 20% of total loans. This is the same standard applied to savings banks. The combined limit for real estate and construction loans, together with real estate PF loans, will be capped at 50% of total loans. However, workplace and group cooperatives whose members are primarily engaged in real estate or construction businesses will be excluded from this limit.

The soundness criteria for mutual financial cooperatives will also be strengthened. The net capital ratio to total assets will be raised to at least 4% by 2030. For credit unions, the minimum net capital ratio required for financial improvement recommendations will be set at 4% by 2030, and the threshold for mandatory financial improvement will be gradually raised to 0%. The management guidance ratio standard for the central associations of mutual financial institutions will be raised to 7%, the same level as for savings banks, and will be applied to credit unions (in 2031), agricultural and fisheries cooperatives (in 2032), and forestry cooperatives (in 2034).

The Financial Services Commission plans to proceed with the pre-announcement of regulatory changes until March 16 and finalize the amendments within the year.

This content was produced with the assistance of AI translation services.