Cooperative Finance Plagued by Embezzlement Scandals... Financial Supervisory Service Chief Says "Damaging Industry Trust"

Lee Bok-hyun, Governor of the Financial Supervisory Service. / Photo by Kang Jin-hyung aymsdream@

[Asia Economy Reporter Song Seung-seop] On the 11th, Lee Bok-hyun, Governor of the Financial Supervisory Service (FSS), warned that “financial accidents such as embezzlement of petty cash are damaging the trust built up over time in the mutual finance sector.”

Governor Lee held a meeting with representatives of mutual finance from four central associations (Shinhyup, Nonghyup, Suhyup, and Sanlimjoap) at the Nonghyup Central Association in Jung-gu, Seoul, stating, “Efforts must be made to strengthen internal control capabilities to prevent financial accidents.” Recently, a series of embezzlement incidents have been uncovered in the mutual finance sector. In May, an embezzlement of 1.1 billion KRW occurred at a Saemaeul Geumgo in Songpa-gu. Last month, a 5 billion KRW embezzlement incident occurred at Nonghyup in Gwangju, Gyeonggi Province, and two weeks later, an employee at a Nonghyup in Gimpo was caught embezzling 7 billion KRW of company funds.

Governor Lee emphasized, “The central associations must strengthen ethics education for cooperative executives and employees and thoroughly inspect internal control conditions to improve any issues.” He added, “Cooperatives themselves need to shift their perception to recognize that establishing and operating effective internal controls is both a financial institution’s own responsibility and an investment to secure customer trust.” He also mentioned, “The FSS will work with the central associations to re-examine operational conditions from the ground up through an internal control improvement task force (TF) and prepare effective improvement measures.”

He continued, “The mutual finance sector has a high proportion of elderly customers, raising concerns about incomplete sales of financial products.” He stressed, “Although the Financial Consumer Protection Act applies only to Shinhyup, Nonghyup, Suhyup, and Sanlimjoap cannot be exceptions in protecting financial consumers.” The implication is that they should enhance internal regulations and build systems comparable to Shinhyup to increase the effectiveness of financial consumer protection.

Regarding risk management, he said, “The high proportion of variable interest rate and lump-sum repayment in household loans is expected to increase borrowers’ repayment burdens and expand non-performing loans when interest rates rise.” He emphasized, “It is necessary to improve the qualitative structure by expanding fixed-rate and installment repayment for household loans and to conduct thorough pre-screening and post-management of corporate loans.”

He also noted, “The mutual finance sector has a high proportion of loans in real estate and construction industries, so the soundness of cooperatives can be greatly affected by fluctuations in the real estate market.” He added, “It is essential to strictly manage sectoral concentration risks in corporate loans and ensure the smooth implementation of recently introduced loan limits for real estate and construction industries.”

He pointed out that, following the trend of rising interest rates, the central associations are reducing bond holdings and rapidly increasing overseas alternative investments. He urged, “Please conduct stress tests for investment assets reflecting key variables such as interest rates and real estate prices, and prepare response plans for crisis situations to enable proactive risk management.”

Meanwhile, regarding the long-standing issue of regulatory discrimination in the mutual finance sector, he promised, “We will create a fair competitive environment and consider support measures such as diversifying revenue sources for the mutual finance sector and expanding ancillary businesses related to credit operations.”

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