Aftermath of LH Scandal... Financial Authorities Push for Improvement in Mutual Finance Lending Practices

Financial Authorities Hold the '2021 1st Mutual Finance Policy Council' Meeting

[Asia Economy Reporter Jin-ho Kim] Financial authorities have decided to improve the lax 'loan practices' in mutual finance that surfaced due to the Korea Land and Housing Corporation (LH) scandal. This will be done by strengthening internal controls such as enhanced loan management for executives and employees and preventing 'self-loans.'

According to financial authorities on the 27th, the Financial Services Commission and related ministries held the '2021 1st Mutual Finance Policy Council' online on the 25th to discuss institutional improvement plans for the mutual finance industry.

First, loan regulation improvement measures related to recent land speculation by some cooperatives, which has become a social issue, were discussed. According to the government's special financial response team for real estate speculation, during an on-site inspection by the Financial Supervisory Service, there were signs that executives and employees of local agricultural cooperatives took out loans under family members' names and then purchased land and commercial buildings. Some executives and employees were involved directly in their own credit screening, but there was controversy due to unclear grounds for sanctions.

In response, the Financial Services Commission plans to pursue five loan regulation improvements for mutual finance. They will establish legal grounds related to loans for executives and employees and clarify the scope of employees subject to these regulations. Additionally, when individual business owners receive farmland mortgage loans, these will be considered business funds and subjected to strengthened screening procedures.

Furthermore, early recovery of loans violating the Farmland Act, prevention of self-loans by executives and employees, and the establishment of joint loan limits will also be pursued.

Moreover, the soundness trends of the mutual finance industry were reviewed. According to financial authorities, although the delinquency rate in mutual finance temporarily improved, the increase in loans to individual business owners and corporations means potential risks persist. A Financial Services Commission official pointed out, "It is necessary to prepare for the possibility of risk expansion, especially as joint loans related to real estate are rapidly increasing."

Measures to resolve regulatory differences between mutual finance sectors in two phases were also discussed. Key topics included the 'same-person credit limit,' which reduces the individual limit from 5 billion KRW to 2.5 billion KRW when calculating credit limits based on capital, as well as external audits and restructuring.

In addition, if a mutual finance cooperative's net capital ratio falls within a range that adds a certain percentage to the corrective action standard, grounds will be established to require measures such as dividend restrictions to preserve capital. This means introducing buffer capital to the mutual finance sector. Like banks and insurance companies, a limit-type credit risk management system will be introduced to the mutual finance sector. Mutual finance cooperatives and central associations will set aside part of unused limit-type credit as loan loss provisions and add it to risk assets when calculating capital ratios.

A Financial Services Commission official explained, "We will listen to opinions from related ministries and the mutual finance industry on the specific details of the improvement plan by the end of August," adding, "Based on the improvement plan, we will proceed with the amendment procedures for related laws and regulations in September."

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