[Mutual Finance Constrained by Regulation] ① Plummeting Performance and Rising Defaults, the Balloon Effect of Household Loan Controls

First Half Performance Halved Compared to Last Year
Delinquency Rates Also Soar
Corporate Loan Surge Driven by Real Estate PF Defaults
Mutual Finance Institutions Forced to Shift Portfolios
Due to Household Loan Regulations Since 2015

Editor's NoteWhat exactly are mutual finance institutions? Are they simply cooperatives designed to benefit their members? By examining Article 1 of the laws governing each mutual finance institution, we can understand their true identity. Mutual finance institutions aim to contribute to the development of local communities and the national economy, based on the spirit of mutual aid and solidarity. This means they bear even greater social responsibility than banks, which prioritize financial market stability and national economic growth above all else. However, over the past decade, mutual finance institutions have faced criticism for focusing on profitability rather than fulfilling their duty to support local communities and ordinary citizens. Behind this, however, were not only market conditions but also poorly designed government regulations. Since 2015, stricter household lending regulations have encouraged a shift toward corporate lending, which in turn led to defaults in real estate project financing (PF) and deteriorating performance. In this special report, Asia Economy examines the unintended consequences of regulations tightening the mutual finance sector. Through this, we aim to propose policy alternatives that will help mutual finance institutions reclaim their identity and drive innovation.

Mutual finance institutions have been posting poor results since 2022. The biggest reason cited is the default of real estate project financing (PF) loans. However, some argue that government regulations also played a significant role in creating an environment where mutual finance institutions had no choice but to focus on PF loans. As household debt surged from 2015, the government strengthened regulations on household lending in the name of soundness, effectively pushing mutual finance institutions to increase corporate lending.

Record Poor Performance and Soaring Delinquency Rates

According to the Financial Supervisory Service and the Ministry of the Interior and Safety on September 11, the combined net profit of mutual finance institutions (NH Nonghyup, Korea Forest Service Cooperative, Saemaul Geumgo, National Federation of Fisheries Cooperatives, and National Credit Union Federation of Korea) in the first half of this year was 748.5 billion won, only about half of last year's first half figure of 1.5512 trillion won.

By institution, Saemaul Geumgo posted the largest net loss at 1.3287 trillion won. The National Credit Union Federation of Korea also recorded a net loss of 337.9 billion won, followed by the National Federation of Fisheries Cooperatives (73.1 billion won loss) and the Korea Forest Service Cooperative (62.2 billion won loss). NH Nonghyup still posted a net profit (2.5504 trillion won), but this was 676.1 billion won less than the first half of last year (3.2265 trillion won). Looking at the annual figures, the decline in net profit is becoming more severe: from 7.5593 trillion won in 2022, to 5.7529 trillion won in 2023, and 2.9889 trillion won last year, more than halving in just two years.

Delinquency rates have also surged. The average delinquency rate (simple average of each institution's figures) rose from 2.2% in 2022 to 3.78% in 2023, 5.83% last year, and 7.34% in the first half of this year. As of the first half of this year, Saemaul Geumgo had the highest delinquency rate at 8.37%, followed by the National Credit Union Federation of Korea (8.36%), the National Federation of Fisheries Cooperatives (7.82%), the Korea Forest Service Cooperative (7.46%), and NH Nonghyup (4.7%).

The poor performance in the mutual finance sector is due to worsening corporate loan defaults. While household loan delinquency rates have been rising gradually, corporate loan delinquency rates have surged. The household loan delinquency rate increased by 1.21 percentage points, from 1.03% in 2022 to 2.22% in the first half of this year. In contrast, the corporate loan delinquency rate jumped by 6.81 percentage points, from 3.92% to 10.73% over the same period. In particular, loans related to real estate, construction, and PF-type loans are cited as the main causes of corporate loan defaults. According to the Bank of Korea's Financial Stability Report, the delinquency rate for real estate and construction loans at mutual finance institutions reached 10.98% in the first quarter of this year, up 8.29 percentage points from 2.69% in 2022. As for outstanding loan balances, they reached 130.2 trillion won during the same period, accounting for 35% of all corporate loans in the mutual finance sector. The delinquency rate for PF-type loans at mutual finance institutions stood at 11.7% at the end of last year.

Mutual Finance Corporate Loans Up 1,143% from 10 Years Ago... Portfolio Shift Driven by Household Loan Controls

The worsening of corporate loan defaults stems from a shift in asset portfolios toward corporate lending over the past decade. According to the Bank of Korea, the outstanding balance of household loans at mutual finance institutions was 215.2838 trillion won in the first quarter of 2015. By the second quarter of this year, it had risen to 271.9574 trillion won, a 26.3% increase from the first quarter of 2015. In contrast, the outstanding balance of corporate loans soared from 30.3963 trillion won to 377.7457 trillion won during the same period, an increase of 1,143%.

This portfolio shift is closely related to the real estate market. Koo Junghan, Senior Research Fellow at the Korea Institute of Finance, explained in his report "Establishing the Identity of Mutual Finance and Reforming the Supervisory System" that "as demand for corporate loans increased due to the real estate boom, mutual finance institutions expanded lending to secure profitability," and "this led to a sharp rise in real estate-related corporate loans."

Additionally, the government's persistent tightening of household loan regulations for mutual finance institutions, regardless of administration, to curb overheating in the real estate market has played a major role. Starting in July 2015, the government introduced a comprehensive household debt management plan and strengthened oversight of real estate-backed loans in the mutual finance sector (including scaling back the additional interest rate system). In 2016, it further tightened controls on non-housing collateral loans (such as lowering the loan-to-value limit) and readjusted the loan-to-deposit ratio regulation (applying regulatory relief only to cooperatives with strong amortization records). From 2017, it strengthened the loan-to-value (LTV) and debt-to-income (DTI) ratios and introduced the debt service ratio (DSR) as a management indicator. Since 2021, it has expanded the scope of DSR application and raised targets for amortization of mortgage loans to further regulate household lending.

Koo noted, "These stricter household loan regulations have led mutual finance institutions to expand their exposure to corporate loans. While the growth of household loans has been curbed, the balloon effect has caused mutual finance institutions to increase large-scale real estate lending, including joint loans, taking advantage of the then-booming real estate market."