Mutual Finance Under Scrutiny by LH... Different Supervisory Ministries and Blind Spots (Comprehensive)

Calls Grow for Unified Supervision and Management of Mutual Finance
Experts Say "Applying Different Regulations to the Same Financial Services Is Preferential Treatment"
Loan Demand Suppression and Staff Shortages Hinder Regulatory Strengthening

[Asia Economy Reporters Kwangho Lee and Seungseop Song] As financial authorities prepare to strengthen regulations and supervision on secondary financial institutions following the Korea Land and Housing Corporation (LH) scandal, voices are rising to unify the management and supervision of mutual finance institutions, which currently fall into regulatory blind spots. The main supervisory departments are fragmented across various agencies, and because these institutions are controlled by separate laws, proper management of local cooperatives or treasuries is not being effectively carried out.

According to the government and related industries on the 15th, the main supervisory authorities for mutual finance institutions such as regional agricultural cooperatives that provided large-scale loans to LH, credit cooperatives, livestock cooperatives, fisheries cooperatives, forestry cooperatives, and Saemaeul Geumgo are all different.

Credit cooperatives are managed by the Financial Services Commission, while Saemaeul Geumgo is overseen by the Ministry of the Interior and Safety. Agricultural and livestock cooperatives fall under the Ministry of Agriculture, Food and Rural Affairs, fisheries cooperatives under the Ministry of Oceans and Fisheries, and forestry cooperatives under the Korea Forest Service.

Because there are separate laws establishing the foundation for mutual finance institutions, which are composed of members with mutual ties, the responsible ministries differ. Currently, laws such as the Credit Cooperatives Act, Saemaeul Geumgo Act, Agricultural Cooperative Act, Fisheries Cooperative Act, and Forestry Cooperative Act each provide the legal basis for conducting mutual finance business.

Supervisory authority is also divided. Credit cooperatives are the only institutions where the Financial Services Commission and the Financial Supervisory Service jointly handle both soundness supervision and comprehensive supervision. The Ministry of Agriculture, Food and Rural Affairs supervises agricultural and fisheries cooperatives comprehensively, the Korea Forest Service supervises forestry cooperatives, and the Ministry of the Interior and Safety is given supervisory authority over Saemaeul Geumgo, with regulations requiring consultation with the Financial Services Commission regarding credit and mutual aid businesses.

A mutual finance official said, "Basically, various cooperative laws primarily aim to improve the rights and interests of specific occupational groups, so it is inevitable that the related ministries are in charge, and supervision is structured accordingly. It would be difficult for some ministries to integrate and exert influence collectively."

Experts Call for Unified Regulation... Some Argue Strong Regulation Is Unrealistic

Experts point out the need for regulations that can be broadly applied, excluding special-purpose policy finance. Unlike commercial banks, which reflect government investment, mutual finance institutions operate by receiving deposits from members but extend loans under relatively lax regulations even to non-members.

Professor Hajoon Kang of Hanyang University’s Department of Economics said, "If differences in supervisory authorities or legal foundations lead to discrepancies in financial authorities’ regulation and supervision, that is problematic. Since mutual finance institutions also perform general financial functions, the related laws should be revised to have unified regulations."

Professor Taegi Kim of Dankook University’s Department of Economics argued, "There has been a regulatory blind spot due to their status as special-purpose banks. Employees involved in the LH scandal might have been aware of gaps in mutual finance institutions." He added, "If the same financial services are provided but different regulations apply, voices claiming preferential treatment will inevitably grow."

In response, financial authorities plan to include measures to strengthen regulations on non-residential collateral loans such as land and commercial buildings in the ‘Household Debt Management Plan’ scheduled for release this month.

The financial authorities are considering expanding the Loan-to-Value ratio (LTV) regulation on land-collateralized loans, which currently applies only to mutual finance institutions, to all banking sectors. For commercial banks, the LTV is applied at around 50-60% of the appraised value, and loan screening is relatively stringent. In contrast, the LTV for non-residential collateral loans in mutual finance institutions is implemented at up to about 70% based on administrative guidance.

Strengthening the Debt Service Ratio (DSR) is also being discussed. The average DSR for commercial banks is about 40%, but for mutual finance institutions, it is 160%. Since DSR is averaged by institution, some borrowers may receive loans at ratios higher than the standard.

However, there are views that strong regulations will be difficult to implement. A significant portion of non-residential collateral loans are secured by land, commercial buildings, and machinery entrusted by farmers and fishermen. Applying regulations uniformly could restrict loans for living expenses beyond speculative funds.

There are also claims that even if strong legal regulations are introduced, insufficient manpower will be an obstacle. Financial authorities, often criticized for manpower shortages, are unlikely to supervise mutual finance institutions at the level of commercial banks. Currently, the National Agricultural Cooperative Federation has over 1,000 local units nationwide, and credit cooperatives have 1,625 cooperatives across various cities and provinces.

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