Credit union under scrutiny over spiraling loan default rate

Korea's major credit union will be under tight government scrutiny amid a sharp increase in its overdue loans. From next week, 100 branches of the Korean Federation of Community Credit Cooperatives will be examined, the Ministry of the Interior...

A Korean Federation of Community Credit Cooperative branch in downtown Seoul on Wednesday [NEWS1]

The government is undertaking a special inspection of the Korean Federation of Community Credit Cooperatives (KFCC) amid a sharp increase in its overdue loans.

From next week, 100 branches of the credit union will be examined, the Ministry of the Interior and Safety said, prompting some depositors to withdraw their savings.

The financial institution’s total loan amount stood at 196.8 trillion won ($151 billion) with 12.2 trillion won, or 6.18 percent, overdue as of Thursday, up 2.59 percentage points from the end of last year.

This is more than 16 times higher than the delinquency rate of commercial banks in April, which is at the highest rate in 30 months at 0.37 percent, according to data released by the Financial Supervisory Service (FSS) Monday.

“The delinquency rate [of the KFCC] continued to increase until mid-June following a global economic slowdown and the weakening property market,” the Interior Ministry said in a press release.

Unlike other savings institutions that are overseen by the FSS, the KFCC is supervised by the Interior Ministry because its legal basis — operating under the Community Credit Cooperatives Act — lies within the Interior Ministry’s jurisdiction.

The government plans to lower KFCC’s delinquency rate to the 4 percent range by managing faulty branches first and actively disposing of non-performing loans (NPLs).

A special inspection will be conducted for 30 KFCC branches with unusually high percentages of overdue loans and poor financial health for five weeks starting Monday.

An inspection team consisting of officials from the Interior Ministry, the FSS, the Korea Deposit Insurance Corporation and the KFCC will center its probe around corporate loans that account for 52.3 percent of all KFCC loans. The team will screen the cooperative credit union’s target policy for delinquency rates and its progress moving forwards.

Officials of the Ministry of Interior and Safety announce plans to lower the KFCC's delinquency rates at the government complex in Sejong on Tuesday. [NEWS1]

Some 70 other KFCC branches will receive a general checkup and will be subject to special inspections themselves if necessary.

Merger requests, suspension of board members and liquidation of non-performing assets are potential moves that may follow the overhaul in accordance with the Community Credit Cooperatives Act, the ministry said. The government may also offer interest cuts for debt settlement.

Another major government scheme to tame the KFCC’s delinquency rate is selling off NPLs.

The Interior Ministry has been encouraging the credit cooperative to sell NPLs by slashing the capital requirements of credit businesses that are allowed to buy them from 5 billion won to 1 billion won last month.

This revision nearly tripled the number of eligible lenders from 67 to 196, according to the ministry.

The ministry claims the delinquency rate, which spiked recently due to a dull housing market, is still “fully manageable,” since most of the NPLs are senior secured loans — or relatively low-risk loans that usually carry floating interest rates and short-term obligations.

The loan-to-value ratio (LTV) also lingers at around 60 percent, meaning that the KFCC can withdraw principal should conditions go further south. LTV is the percentage of a loan compared to the value of a security. A 60 percent LTV indicates that the amount borrowed is equal to 60 percent of the value of the asset.

The Interior Ministry refuted claims that the KFCC lacks adequate financial supervision, offering assurances that it is overseeing the credit cooperative branch-by-branch and implementing regulations on par with the FSS.

“KFCC offers coverages up to 50 million won per depositor, just like all other financial institutions,” it added.

"Overdue loans will continue to be managed in close coordination with the financial regulators."

BY KIM NAM-JUN, SOHN DONG-JOO [sohn.dongjoo@joongang.co.kr]