Shinhan Credit Unions Expanding Business Areas... Operational Inexperience Persists

This Year, 83 Cooperative Sanctions Issued
More Than Last Year's Sanctions
Need to Enhance Expertise in Credit Screening and More

[Asia Economy Reporter Kim Min-young] As the National Credit Union Federation of Korea (NACUFOK) has achieved its long-cherished goal of expanding its business area, cases of operational incompetence, such as miscalculating loan amounts, are still being uncovered in local credit unions. Since the scope of business is expected to widen as early as the end of this year, there are calls to further enhance expertise in internal credit screening and post-management.

According to the financial sector on the 10th, the number of disciplinary actions taken by credit unions themselves from January to July this year was 83, exceeding the total of 75 cases in 2018. At this rate, it is estimated that the number of disciplinary actions will surpass last year's 148 cases. During the same period, the number of sanctions imposed by the Financial Supervisory Service (FSS) was 5, the same as the total number of sanctions last year (5 cases).

Incidents that should not occur in the mutual finance sector, which handles banking-like tasks such as loans and deposits, have frequently happened. Recently, a credit union in Daegu was issued a ‘formal warning’ by the FSS after being found to have exceeded the loan limit for a single borrower.

According to the FSS, mutual finance institutions like credit unions must lend to a single borrower within the larger of 20% of their own capital or 1% of total assets. However, this credit union lent KRW 17.01 billion (104 cases) to 8 borrowers over 14 years from 2005 to 2018, exceeding the single borrower loan limit (KRW 500 million) by up to KRW 2.219 billion.

This credit union also failed to strictly manage loans to employees. According to the Credit Union Act, credit unions cannot accept loans secured by real estate other than housing owned by executives and employees. Nevertheless, in November last year and July 2018, two individuals including Executive Director A of this credit union took out loans of KRW 50 million secured by land owned by their spouses and mothers, which was detected. Executive Director A received an improvement order, and the employee was severely disciplined with a three-month suspension.

A financial sector official pointed out, “If credit unions have earned the right to expand their loan areas through effort, they must establish loan and deposit systems commensurate with that. Without thorough retraining of underperforming credit unions, financial accidents can occur at any time.”

The Financial Services Commission plans to divide the current 226 city, county, and district-level loan areas of credit unions into 10 regions: Seoul, Incheon-Gyeonggi, Busan-Ulsan-Gyeongnam, Daegu-Gyeongbuk, Daejeon-Sejong-Chungnam, Gwangju-Jeonnam, etc., through amendments to the Enforcement Decree of the Credit Union Act and the Mutual Finance Business Supervision Regulations. It also relaxed regulations by considering loans within these regions as member loans. This is expected to be implemented around the end of this year.

Additionally, the requirements for expanding joint bonds will be eased. Joint bonds refer to the business area units that determine the establishment of a credit union and its members. The requirement of ‘asset size of KRW 100 billion or more’ has been abolished, allowing small and medium-sized credit unions with excellent financial soundness and performance in microfinance to expand joint bonds to adjacent single city, county, or district units. Furthermore, regardless of the location of the main office, credit unions can expand joint bonds to parts of adjacent towns and townships in neighboring cities, counties, or districts. As of the end of March, there are 883 credit unions with about 6.36 million members. Total assets have also reached KRW 104 trillion.

This content was produced with the assistance of AI translation services.