Illegal Loans, Dividend Feasts, Disclosure Rule Violations... Deep-Rooted Moral Hazard in Mutual Finance (Comprehensive)

Violations of Loan Regulations Including Exceeding Individual Limits Punished
High Dividends Around 70% Despite Deteriorating Soundness and Performance
Some Cooperatives Still Omit Disclosures Despite Strengthened Management Reporting Regulations

[Asia Economy Reporter Song Seung-seop] The A Agricultural Cooperative in the Yulgok area of Gyeongnam was sanctioned by the Financial Supervisory Service with measures such as suspension of duties for executives and employees after it was found last year that the loan limit for a single borrower was exceeded by up to 4.817 billion KRW. Despite the requirement to assess the purpose of funds, the amount and period needed, and repayment ability when handling loans to provide an appropriate amount, the cooperative was found to have issued loans to three borrowers for real estate development projects.

Amid the LH (Korea Land and Housing Corporation) speculative loan scandal revealing the reality of mutual financial institutions becoming 'playgrounds for speculators,' concerns are rising that some mutual financial institutions are excessively operating 'blind' funds.

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

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 their spouses' names to secure eight loans with neighborhood commercial buildings and land as collateral. The cooperative exceeded the single borrower maximum 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 lend beyond the limit set as the greater of 20% of their own capital or 1% of total assets to a single borrower. This is intended to prevent loan concentration and maintain the cooperative's soundness.

Increasing Dividends Despite Worsening Performance, Violations of Management Disclosure Regulations

Some institutions have been holding 'dividend feasts' despite steadily worsening soundness and performance. A credit cooperative in the Gyeongbuk region had a total capital ratio (BIS) of 6.72% in the first half of last year. This is about half of the 15% ratio of domestic commercial banks and below the bank regulatory ratio of 10.5%. The net asset ratio against total assets regulated for mutual financial institutions was 2.8%, down 0.06 percentage points from the previous year, barely exceeding the regulatory level of 2%. However, the dividend payout ratio steadily maintained a high dividend policy in the 70% range, rising from 73.3% in 2018 to 74.9% in 2019.

A Seoul-based credit union saw its net income decrease by 1.7 billion KRW (33.47%) from 507 million KRW a year earlier to 337 million KRW. Interest income was 8.539 billion KRW (-12.37%), and operating income was 9.3 billion KRW (-11.95%). Nevertheless, during the same period, the dividend payout ratio was sharply increased by about 20%, from 55.5% to 76%. While financial holding companies with improved indicators are limited to a 20% dividend payout ratio, mutual financial institutions with worsening management conditions significantly increased their dividend payout ratios.

Cases of non-compliance with management disclosure regulations established by financial authorities to promote sound business and eradicate illegal practices were also found. The Financial Supervisory Service stated, "Disclosure only to individual cooperatives results in low accessibility and insufficient utilization," and mandated simultaneous disclosure on both the cooperative and central association websites for regular and occasional disclosures. However, among the fisheries cooperatives under the National Federation of Fisheries Cooperatives last year, only four cooperatives?Jukbyeon Fisheries Cooperative, Ulleung County Fisheries Cooperative, Daecheon West Fisheries Cooperative, and Yokji Fisheries Cooperative?complied. This means 95% (87 cooperatives) violated the regulations.

Some cooperatives completely omitted management disclosures. For example, Chujado Fisheries Cooperative did not upload management disclosure files last year. Instead, the attached link showed a 'not found' message, making last year's management details unavailable. Gimhae City Forestry Cooperative has not uploaded first-half management disclosures since 2018, only posting settlement disclosures. Despite orders and strengthened regulatory measures from financial authorities, the lukewarm attitude of mutual financial central associations is criticized for insufficient on-site regulation enforcement.

A Financial Supervisory Service official lamented, "The supervisory authority for mutual financial institutions is divided, making supervision inevitably lax," adding, "The central association primarily holds supervisory sanction 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.