"2%→7% Strengthening Management Guidance Ratio in Mutual Finance Sector... Accelerating Soundness Improvement"
2nd Mutual Finance Policy Council
Provisioning Schedule Deferred by Half a Year
Shinhyeop Member Investment Limit Raised from 10% to 15%
Next Year's Household Loan Management Plan Established
The Financial Services Commission (FSC) will strengthen soundness by gradually raising the management guidance ratio of the central associations of mutual finance sectors from the current 2%~5% to 7%.
On the 3rd, the FSC held the 2nd Mutual Finance Policy Council and announced the "Mutual Finance Sector Soundness Enhancement Plan," which includes this measure. This plan focuses on improving capital adequacy and loss absorption capacity in response to recent concerns about increased risks in the mutual finance sector.
First, the minimum management guidance ratio (capital ratio against risk-weighted assets) of the central associations will be gradually increased. The current management guidance ratio of 2% for agricultural, fisheries, and forestry cooperatives and 5% for credit unions and Saemaeul Geumgo will be raised to 7% over the next 10 years. Credit unions and Saemaeul Geumgo must achieve the 7% level by 2028, agricultural and fisheries cooperatives by 2032, and forestry cooperatives by 2034. This level approaches that of banks (8%) and savings banks (7%, and 8% for those with assets over 1 trillion KRW).
Institutional improvements for capital expansion of individual cooperatives will also be implemented. The statutory reserve mandatory accumulation limit for credit unions will be raised from twice the paid-in capital to three times the equity capital, and the member investment limit will be increased from 10% to 15%, the level of Saemaeul Geumgo. This aims to enhance the loss absorption capacity of the cooperatives.
The FSC also adjusted the reserve accumulation schedule considering the burden on small and medium-sized cooperatives. The original schedule, which planned for 120% reserve accumulation by December 2024 and 130% by June 2025, has been extended by six months to 120% by June 2025 and 130% by December 2025.
An FSC official explained, "There were many opinions that small and medium-sized cooperatives faced significant difficulties as several measures, including real estate PF soundness evaluations, were concentrated in timing," adding, "After analyzing the actual impact through simulations, we judged that a six-month deferral was necessary."
In fact, the mutual finance sector has already accumulated an additional 880 billion KRW in reserves through strengthened real estate PF feasibility evaluations. Since last year, financial authorities have strengthened the real estate PF feasibility evaluation criteria, reclassified ratings, and required corresponding reserve accumulation.
Management of large cooperatives will also be strengthened. For example, stress tests will be introduced for large cooperatives with assets over 1 trillion KRW, and large credit limits regulations will apply to cooperatives with total assets over 500 billion KRW. Additionally, the concept of the same borrower will be introduced in the mutual finance sector, similar to banks and savings banks, to prevent concentration risk.
Meanwhile, to prevent a balloon effect caused by strengthened household loan management in the banking sector, the FSC plans to establish household loan management plans for the mutual finance sector next year. However, to strengthen their original role as institutions for low-income finance, they will move away from the practice of mainly collateral loans and expand policy fund loans such as Sa-itdol loans and mid-interest rate loans while simultaneously managing risks.
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Kim So-young, Vice Chairman of the FSC, emphasized, "As the mutual finance sector's share in the domestic financial market and regional economy has greatly increased, it must fulfill its corresponding roles and responsibilities," adding, "We hope that each mutual finance institution will proceed steadily with efforts to enhance soundness, such as reserve accumulation, capital expansion, and non-performing loan cleanup, with a sense of responsibility."
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