Authorities Tighten Control on Mutual Finance Loans... Concerns Over 'Temporary Measures and Farmer Damage'

Bijudamdae LTV Regulation
Expansion to Financial Sector from 17th
Concerns Over Patchwork Measures
Proper Supervision to Match Purpose
Delicate Review of Qualification Criteria Needed

[Asia Economy Reporters Kwangho Lee and Chaeun Koo] Despite controversies that mutual finance's 'self-excessive lending' played a role as a funding source in the real estate speculation allegations triggered by Korea Land and Housing Corporation (LH), the sharp increase in farmland-secured loans by Nonghyup Mutual Finance is interpreted as largely due to a balloon effect caused by banks' loan restrictions. Additionally, the relatively looser regulations compared to commercial banks also contributed to the ability to obtain more loans.

Experts pointed out that the follow-up measures announced by the government for LH alone may be insufficient to prevent illegal loans by mutual finance institutions, which are blind spots in monitoring and supervision, and emphasized the need for a comprehensive review of the entire supervisory system.

According to the office of Yoon Chang-hyun, a member of the National Assembly's Political Affairs Committee from the People Power Party, the scale of non-residential real estate secured loans by mutual finance institutions reached 257.5 trillion won last year, accounting for 64.2% of all mutual finance loans. Most of these loans are land-secured loans based on farmland and similar assets, and the financial sector estimates that a significant portion originated from Nonghyup Mutual Finance. In fact, Nonghyup Mutual Finance, a secondary financial institution, has total assets of 429.3938 trillion won and total loans of 290.618 trillion won, making it the largest financial institution in Korea by scale.

The government's announcement of sweeping loan regulations on mutual finance was also prompted by findings that real estate speculation funds were concentrated in loans from regional Nonghyup branches. At the end of last month, financial authorities announced through household debt management measures that Loan-to-Value (LTV) ratio regulations on non-residential real estate such as land, officetels, and commercial buildings would be expanded and enforced across all financial sectors.

Currently, mutual finance institutions have more lenient LTV and Debt Service Ratio (DSR) standards compared to banks. While financial authorities have managed mutual finance's non-residential mortgage LTV at 40-70% through administrative guidance, banks are capped at a maximum LTV of 60%. Compared to banks, mutual finance institutions have been less stringent. Also, banks are required to manage average DSR within 40%, but mutual finance institutions are allowed to maintain an average DSR of up to 160% until the end of this year, providing them with relatively more leeway.

Starting in July, a 40% LTV will be applied to new non-residential mortgage loans within land transaction permission zones. However, existing farmers will be exempted from the 40% LTV application through verification of the Agricultural Register and Agricultural Management Entity Certificate, as part of measures to protect genuine demand before the regulation takes effect. Lee Se-hoon, Director of Financial Policy Bureau at the Financial Services Commission, explained, "The increase in non-residential secured loans was not significant, and considering the usage purposes of borrowers such as farmers and fishermen, separate regulations were not applied. However, there is a risk of concentration due to regulatory blind spots, and the recent LH incident has highlighted the need for regulation."

On the 5th, in front of the LH Corporation Seoul Regional Headquarters in Gangnam-gu, Seoul, officials affiliated with the National Demolition Residents Council held a press conference urging the dismantling of LH, the establishment of a Housing Agency, and the stabilization of housing for low-income residents. Photo by Kang Jin-hyung aymsdream@

However, experts warn that this measure may be a temporary fix and emphasize that strengthening management and supervision, along with various regulations and supplementary measures aligned with the founding purpose of mutual finance institutions, should take priority. Professor Ha Joon-kyung of Hanyang University’s Department of Economics said, "Mutual finance institutions are community-based and relationship-oriented, specializing in financial services for ordinary citizens. If funds are concentrated for real estate or land speculation, it contradicts the institution’s founding purpose. The issue should be addressed from the perspective of management gaps and systemic problems at the financial authority level."

Jung Dae-young, Director of Songhyun Economic Research Institute, also stressed, "If regulations are to be applied to non-residential secured loans, detailed eligibility criteria for cooperatives, non-members, farmers, and non-farmers should be carefully reviewed and examined," emphasizing the need for supervision of concentration and balloon effects. Professor Kim Tae-gi of Dankook University’s Department of Economics advised, "Financial supervision is bank-centered, and non-bank sectors including mutual finance have different responsible ministries, such as the Ministry of the Interior and Safety for Saemaeul Geumgo, which can lead to loopholes in laws and systems. This should be approached not as a problem of mutual finance itself but through rules and systemic reforms."

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