[Donmaekgyeonghwa] Mutual Finance Sector Faces Cash Flow Crisis...All-Out Effort to Secure Liquidity

[Asia Economy Reporter Eunju Lee] Mutual financial institutions are actively working to secure liquidity. As the real estate market stagnates and the capital market tightens, each central association is sending official letters to branches to implement measures to secure funds. They are ordering to "make every effort to secure liquidity" while consecutively introducing measures that restrict or prohibit new loans such as joint loans.

According to the financial sector on the 2nd, mutual financial institutions sent official letters to each branch last month emphasizing the need to "make every effort to secure liquidity" and decided to implement measures such as strengthening loan restrictions starting this month. This is because they judged that if the number of borrowers unable to repay increases amid concerns over interest rate hikes and a downturn in the real estate market, it could lead to deterioration of liquidity and profitability of the cooperatives.

The NongHyup Central Association also decided to stop accepting new real estate-related PF (Project Financing) loans and joint loans such as group loans starting from the 4th. Additionally, NongHyup Central Association sent official letters to each cooperative stating that "to proactively respond to risk signs such as a sharp increase in delinquency rates of real estate PF loans, refinancing from other banks (switching loans from other banks to NongHyup loans) will be fundamentally prohibited for all joint loans." Except for a few exceptional conditions such as completion of permits related to real estate development and credit enhancement like payment guarantees or debt assumption by construction companies, they intend to strongly close the door to joint loans.

Saemaeul Geumgo began restricting joint loans from the 14th of last month. The Saemaeul Geumgo Central Association sent official letters to each branch last month regarding the management of cooperatives with excessive proportions of joint loans, and if the joint loan balance of each cooperative exceeds 40% of the cooperative's loan balance as of the end of the previous previous month (35% in 2023), new joint loans cannot be accepted. Joint loans include real estate development-related PF loans and group loans jointly executed for borrowers in new apartment sales. Unlike other mutual financial institutions that have uniformly "completely banned" new joint loans, this approach allows individual cooperatives to restrictively execute loans considering their own financial situations.

The Credit Union Central Association decided to temporarily suspend new acceptance of interim payment loans, relocation loans, and burden charge loans among group loans until December 31. Earlier, on the 13th of last month, the Credit Union Central Association also sent official letters to each cooperative emphasizing the need to "make every effort to secure liquidity." The Credit Union stressed, "As of the end of September 2022, the liquidity coverage ratio (LCR) of all cooperatives was 89.5%, which is lower compared to banks (98.9%), and the number of cooperatives below the 'caution' level based on liquidity stage criteria has been steadily increasing since the end of 2021. We must make every effort to secure sufficient liquidity to enable appropriate crisis management relative to the current liquidity level."

The reason mutual financial institutions are raising loan thresholds one after another like this is because it has become difficult to raise funds due to the base interest rate hike, and the possibility of loan defaults related to the real estate market downturn is also increasing. As the number of borrowers unable to repay increases due to the economic downturn, liquidity can deteriorate. A mutual financial institution official explained, "Currently, all banks have entered risk management, and mutual financial institutions are no exception," adding, "This is a proactive response to risks that may arise as PF projects are halted due to the real estate market downturn."

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