The Persistent 'Moral Hazard' in Mutual Finance Institutions

Strengthened Management Disclosure Regulations Still Miss Some Associations
Some Face Penalties for Violating Loan Rules Like Exceeding Individual Limits
Despite Deteriorating Soundness and Performance, 70% Range High Dividend Payouts Continue

[Asia Economy Reporter Song Seung-seop][Asia Economy Reporter Song Seung-seop] As the loopholes in mutual financial institutions managed by LH (Korea Land and Housing Corporation) speculation suspects have been fully exposed and the government and financial authorities have decided to strengthen regulations, it has been found that the preemptively implemented mutual financial system improvement measures are not being properly observed.

According to the financial sector on the 27th, many cooperatives have been found not to comply with the management disclosure enhancement measures prepared by the financial authorities to ensure sound operations of mutual finance and eradicate illegal practices. The Financial Supervisory Service (FSS) stated in 2019 that "disclosure only by individual cooperatives has low accessibility and insufficient utilization," and required both regular and occasional disclosures to be simultaneously posted on the websites of both the cooperatives and the central association. 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) did not comply.

Some cooperatives completely omitted management disclosures. In the case of Chujado Fisheries Cooperative, no management disclosure file was uploaded last year. Instead, the attached link showed a "not found" message, making last year's management details unavailable. Gimhae City Forestry Cooperative has not posted the first half-year management disclosure since 2018 and only posts settlement disclosures. Despite the financial authorities' orders and regulatory strengthening measures, criticism arises that the lukewarm attitude of the mutual finance central association results in insufficient application of on-site regulations.

An official from the FSS lamented, "The supervisory authority for mutual finance is divided, so supervision is inevitably neglected," adding, "Primarily, the central association holds supervisory sanction authority, and the FSS has no authority except for some credit business, making management difficult."

Sanctioned by Financial Authorities for Poor Management, Yet Holding 'Dividend Parties' Despite Worsening Business Conditions

Among some mutual financial institutions, many have exploited regulatory and supervisory blind spots to receive sanctions from financial authorities due to poor loans and reckless management. An agricultural cooperative in the Yulgok area of Gyeongnam was sanctioned by the FSS last year for exceeding the individual loan limit by up to 4.817 billion KRW. The cooperative was found to have provided loans to three borrowers for real estate development projects without properly assessing the purpose, required amount, duration, and repayment ability, despite the requirement to support appropriate amounts when handling loans.

The Naju Credit Cooperative in Jeonnam was caught by the FSS for four employees 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 lend beyond the limit set as 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 cooperatives' soundness.

There were also cases where 'dividend parties' were held despite deteriorating 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 lower than the bank regulatory ratio of 10.5%. The net asset ratio against total assets regulated for mutual finance 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. While financial holding companies with improved indicators are limited to a 20% dividend payout ratio, mutual finance institutions with worsening business conditions significantly increased their dividend payout ratios.

A credit union in Seoul saw its net income drop by 170 million 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%.

The soundness issue of mutual finance is currently recognized as serious. According to the FSS, as of the end of the first half of last year, the loan delinquency rate in the mutual finance sector reached 2.02%, up 0.31 percentage points from 1.71% the previous year. This is the first time since 2014 that the mutual finance loan delinquency rate has reached 2%.

Experts pointed out the need for unified regulations for the mutual finance sector. Professor Kim Tae-gi of Dankook University's Department of Economics analyzed, "There was a blind spot in supervision and regulation because it was a special-purpose bank." Professor Ha Jun-kyung of Hanyang University's Department of Economics advised, "Since mutual finance also plays the role of a general financial institution, it is necessary to revise the law to have unified regulations."

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