Korean mutual cooperatives join liquidity squeeze amid surging losses

[Provided by Maekyung Media Group]

South Korean mutual aid associations, who are sizeable public institutions, are struggling to meet payments to members due to plunge in securities value and hedging cost from volatile exchange rate.

The steep rise in the U.S. dollar has generated additional costs worth hundreds of million dollars to Korean mutual aid associations who are fast losing money in their reserves, according to investment banking sources on Sunday.

Since the beginning of the year, the Korean won lost nearly 20 percent against the U.S. dollar.

Rising loan demand has also burdening some cooperatives. Members have been turning more to the cooperatives as they offer lower rates cheaper by around 1 percentage point than commercial banks.

The Korea Teachers’ Credit Union, for example, offers a lending rate of 4.4 percent.

Default ratio has been rising in line with loan demand. Out of all 236 branches of the Korean Federation of Community Credit Cooperatives in Seoul, three posted a default rate of double digits in the second quarter.

“Despite greater loan demand, it is hard to raise capital base due to poor debt market condition. Liquidity issue will likely last at least until the end of the year,” said an official from the investment banking industry.

By Kang Doo-soon, Cho Yoon-hee and Lee Ha-yeon