Korea to conduct special probe of 30 community credit cooperatives

A signboard of the Korean Federation of Community Credit Cooperatives (KFCC) in Seoul [Photo by Yonhap]

South Korea is planning to conduct special inspections of 30 out of 1,290 community credit cooperatives that have relatively high default rates across the country and push to restructure them by merging or closing them.

The move comes as the default rate at MG Korean Federation of Community Credit Cooperatives (KFCC) surged to 6.4 percent on a provisional basis in the second quarter of this year, with some community credit cooperatives closing due to bad loans.

According to sources on Sunday, the Ministry of the Interior and Safety held a meeting with KFCC on June 30 to receive a report from the federation on the delinquency rate and discuss countermeasures.

“We plan to conduct special inspections of 30 community credit cooperatives with high default rates and we also plan to hold regular inspection meetings with KFCC,” an official from the ministry said. “Depending on the results, we may announce management improvement measures if deemed necessary.”

The default rate at KFCC in the first quarter was 5.34 percent, higher than the 2.42 percent default rate for other cooperative financial institutions, such as National Credit Union Federation of Korea, National Agricultural Cooperative Federation, National Federation of Fisheries Cooperatives and National Forestry Cooperative Federation.

KFCC is also showing a steep upward trend in both the scale of fund outflows and the default rate compared with other mutual financial institutions. It has been plagued by rumors of fund outflows since the beginning of this year. In particular, during the months of March and April, there was a rapid outflow of savings and installment deposits, resulting in an outflow of funds amounting to nearly 7 trillion won ($5.32 billion).

KFCC’s outstanding balance dropped continuously to 262.14 trillion won in March and 258.28 trillion won in April from 265.27 trillion won in February. This is in contrast to the entire mutual financial sector, which saw an increase of over 9 trillion won, reaching 475.36 trillion won during the same period.

The delinquency rate at KFCC also continued to rise in the first half of the year as non-performing loans increased due to the real estate slump. The delinquency rate, which was around 3 percent at the end of last year, doubled to 6.4 percent on a provisional basis in the first half. Dongbu Community Credit Cooperatives in Namyangju, Gyeonggi Province is in the process of closing after a 60 billion won ($45.58 million) project financing (PF) loan went bad. It is slated to be merged into Hwado Community Credit Cooperatives with sound financial health in the same region on July 22.

[Courtesy of Ministry of the Interior and Safety]

An official from the Bank of Korea’s Daegu-Gyeongbuk branch said that “there is a possibility that the asset soundness of real estate-related loans in community credit cooperatives in Daegu, North Gyeongsang Province has deteriorated more than the overall loan soundness of the entire federation.”

The issue of liquidity risk cannot be ignored, either. At the end of February, 413 community credit cooperatives, or about one-third, of the 1,294 nationwide had a liquidity ratio of less than 100 percent. Adding to this, the revelation of embezzlement and misappropriation by some employees has further increased concerns.

KFCC maintains the position that fund outflows are showing signs of stabilization and the default rate is manageable.

“Although the default rate has increased in the first half of the year, it is only for some debtors in real estate and construction industries. Considering the overall asset size and other factors, there is no cause for concern,” a KFCC official explained. “The decline in savings and installment deposits has eased since May, and the situation has significantly stabilized.”

An official from the Ministry of the Interior and Safety said, “KFCC is implementing various measures such as selling non-performing loans, debt adjustment and refinancing loans, and it is currently at a sufficiently manageable level. We plan to proactively manage risks by conducting special inspections and closing or merging some struggling community credit cooperatives.”

Industry insiders seem to be concerned that the KFCC risk may spread across financial companies, creating unnecessary implications. It has been pointed out that while other cooperative financial institutions - such as National Credit Union Federation of Korea, National Agricultural Cooperative Federation, National Federation of Fisheries Cooperatives, and National Forestry Cooperative Federation - are supervised by financial authorities, KFCC is managed under the Ministry of the Interior and Safety and is subject to relatively lax standards.

For one thing, other mutual financial institutions disclose their default rates every quarter, while KFCC and the ministry only officially manage the year-end default rate.

The ministry claims that there is no problem as it is closely coordinating with financial authorities, such as the Mutual Financial Policy Council. In response to the current dire situation, the ministry said this week that it will release KFCC’s default rate for the first quarter and propose countermeasures, including measures to manage individual community credit cooperatives.