Saemaul Geumgo to face first on-site probe

[Photo by Kim Ho-young]

Trouble continues to brew for South Korean community-based financial institution Saemaul Geumgo. Following a bank run in 2023 that led to a staggering 94.5 percent drop in net profit, recent concerns over real estate project financing (PF) defaults have led to a rise in delinquency rates that signal further challenges to its financial health. In response to these concerns, financial authorities initiated on-site inspections for the first time.

Adding to the institution‘s woes, recent controversies emerged when a candidate from the Democratic Party of Korea faced allegations of illicitly obtaining loans in 2021.

According to sources on Sunday, the Financial Supervisory Service (FSS), along with Korea Deposit Insurance Corporation and Central Saemaul Geumgo, will launch an on-site probe of Saemaul Geumgo for two weeks from April 8th, 2024. This inspection will primarily target four locations with relatively large asset sizes and marks the first time that Saemaul Geumgo, previously under the supervision of the Ministry of the Interior and Safety, will undergo on-site inspections by the FSS. The move stems from an agreement reached between the Financial Services Commission and the ministry in February 2024 to strengthen regulatory oversight, leading to the formation of an inspection coordination body involving the FSS, KDIC, and Central Saemaul Geumgo.

During the inspection, the FSS will focus on scrutinizing Saemaul Geumgo’s asset quality management and its delinquency rates in particular. The delinquency rate for Saemaul Geumgo loans, which was 1.93 percent at the end of 2021, escalated to 3.59 percent by the end of 2022 and further surged to 5.07 percent by the end of 2023. In contrast, the delinquency rate for the mutual finance sector excluding Saemaul Geumgo was 2.97 percent at the end of 2023, or 2.1 percentage points lower. It is estimated that Saemaul Geumgo‘s delinquency rate rose to the 7 percent range in February 2024.

[Graphics by Song Ji-yoon and Minu Kim]

The sharp increase in delinquencies, particularly in corporate loans stemming from real estate project financing (PF), is intertwined with concerns over Saemaul Geumgo’s financial performance. Despite generating a net profit of 86 billion won ($63.8 million) in 2023, this figure represents a 94.5 percent drop from the previous year‘s 1.55 trillion won.

Moving forward, the FSS plans to conduct separate on-site inspections akin to Saemaul Geumgo for savings banks once delinquency rates for the first quarter of 2024 are compiled, aiming to assess potential crises. The FSS has also been proactively implementing real-time systems to prevent situations akin to the Silicon Valley Bank incident, where mass deposit withdrawals occurred due to concerns over the second-tier financial sector’s solvency.

Meanwhile, the Financial Services Commission is elevating supervisory measures for Saemaul Geumgo. As part of a restructuring initiative in early April 2024, the commission will establish a dedicated team within the Financial Industry Bureau to oversee Saemaul Geumgo-related matters. The commission also plans to receive regular and ad-hoc information necessary for continuous monitoring of Saemaul Geumgo from the ministry via computer systems, and any findings resulting from the Commission‘s monitoring will be shared with the ministry.