High delinquency of MG Community raises concerns over soundness

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

The South Korean government on Tuesday reassured consumers that the financial soundness of MG Community Credit Cooperatives is at a secure level and that the mutual financial institution is being closely monitored by the authority.

The Ministry of the Interior and Safety announced special measures in relation to mounting concerns about the deteriorating soundness and lack of disclosed financial information of MG Community Credit Cooperatives.

Under the measures, the ministry plans to carry out special due diligence on the credit cooperatives, including a special examination of 30 credit cooperatives with high delinquency rates and the monitoring of 70 credit cooperatives, over five weeks starting Monday.

Monitoring will take place on a weekly basis to assess the status of delinquency reduction and if necessary, measures such as demanding mergers, settlement of non-performing assets, and suspension of executives’ duties may be taken in accordance with the relevant law.

The ministry aims to reduce the delinquency rate to 4 percent or below by the end of this year from the current 6 percent range.

As of June 29, the delinquency of the MG Community Credit Cooperatives amounted to an all-time high of 12.16 trillion won ($9.38 billion).

The ministry will also conduct regular inspections of 87 businesses that have taken out loans worth more than 20 billion won from multiple MG Community Credit Cooperatives.

These credit cooperatives often provide loans to businesses, mainly in the construction and real estate industries, jointly from multiple branches.

Non-performing loans are continuously sold to MCI Credit Finance, controlled by subsidiaries of the Korean Federation of Community Credit Cooperatives (KFCC), and Korea Asset Management Corp.

Some 300 billion won has already been sold last month, and additional 100 billion won and 300 billion won are scheduled to be sold in the second half of the year.

There have been concerns about the lack of disclosed information of credit cooperatives.

A customer makes a visit to a branch of KFCC in Seoul. [Photo by Kim Ho-young]

According to disclosures posted on the KFCC website, more than 20 credit cooperatives were rated grade 4 in terms of their asset soundness last month.

Institutions rated grades 4 and 5 are subject to remedial actions. However, a downgrade in the rating in March was disclosed in June, resulting in a significant information gap for consumers.

According to the relevant law, deposits in MG Community Credit Cooperatives are protected up to 50 million won per person.

However, deposits worth about 200 billion won were withdrawn in a single day, according to industry sources, following a media report last month that said that the delinquency rate of the nationwide MG Community Credit Cooperatives exceeded 6 percent.

Fears mount further as the supervisor, or the government, for the credit cooperatives has only 10 standing officials to oversee the institution that manages a total of 284 trillion won in assets and 21.8 million customers.

This has sparked criticism regarding the lack of financial expertise at the ministry as the supervisor.

“I don’t think we particularly lack expertise,” said an unnamed official from the ministry. “We are in close discussions with financial authorities for this matter.”

Financial authorities can only step in for supervision at a request by the interior ministry.

The interior ministry’s annual comprehensive audit of the KFCC involves 26 personnel from eight different organizations. The ministry also selects 30 to 40 credit cooperatives each year and conducts joint audits with the Financial Supervisory Service.

“Financial authorities with specialized expertise should continue to be in charge of this issue, as the cooperatives’ soundness has already deteriorated and there may be additional risks,” said Sung Tae-yoon, professor at Yonsei University.

“The supervisory framework should be changed now because further deterioration of the cooperatives could jeopardize the overall financial system.”