Excessive Negligence and Mismanagement... Moral Hazard Rooted in Mutual Finance

Violation of loan regulations such as exceeding individual limits leads to crackdown
Despite worsening soundness and performance, 70% range high dividend celebrations continue
Even with strengthened management disclosure regulations, some cooperatives still omit disclosures

The A Agricultural Cooperative in the Yulgok area of Gyeongnam was sanctioned by the Financial Supervisory Service last year for exceeding the individual loan limit by up to 4.817 billion KRW, resulting in suspension of duties for its executives and employees. Despite the requirement to assess the purpose, amount, duration, and repayment ability when handling loans to provide appropriate amounts, it was revealed that the cooperative issued loans to three borrowers for real estate development projects.

Amid the LH (Korea Land and Housing Corporation) speculative loan scandal exposing mutual financial institutions as playgrounds for speculators, concerns are rising that some mutual financial institutions are excessively operating funds in a 'blind' manner.

Many institutions have exploited regulatory and supervisory blind spots, receiving sanctions from financial authorities due to poor loans and reckless management.

According to financial authorities and the financial sector on the 22nd, Naju Credit Cooperative in Jeonnam was caught by the Financial Supervisory Service for four executives violating regulations by using their own and spouses' names to secure eight loans with collateral such as neighborhood stores and land. The cooperative exceeded the individual maximum loan limit by up to 1.74 billion KRW using their own and third-party names, and also exceeded the non-member loan limit by 12.841 billion KRW. Currently, mutual financial cooperatives cannot issue loans exceeding the greater of 20% of their own capital or 1% of total assets to a single individual. This is intended to prevent loan concentration and maintain the cooperative's soundness.

Some institutions continued to hold 'dividend feasts' despite steadily worsening soundness and performance. A credit union in the Gyeongbuk region had a total capital ratio (BIS) of 6.72% in the first half of last year, about half that of domestic commercial banks at 15%, yet maintained a high dividend payout ratio in the 70% range since 2018. A credit union in Seoul saw its net income drop by 33.47% year-on-year last year but increased its dividend payout ratio significantly from 55.5% to 76.0%. While financial holding companies with improved indicators reduced dividends to 20%, mutual financial institutions with deteriorating management conditions increased dividends.

Cases of non-compliance with management disclosure regulations established by financial authorities to promote sound operations and eradicate illegal practices were also found. Among the fisheries cooperatives under the National Federation of Fisheries Cooperatives, 95% (87 cooperatives) failed to post management disclosures on the federation’s website. Some forestry cooperatives omitted disclosures for the first half of the year, making it impossible to assess their management status.

An official from the Financial Supervisory Service lamented, "The supervisory responsibilities for mutual financial institutions are divided, making it inevitable that supervision is lax. Primarily, the central federation holds supervisory and sanctioning authority, and the Financial Supervisory Service has limited authority except for some credit business, making management difficult."

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