Mutual financing firms see risk grow

Delinquent loans held by Korean mutual financing companies have exceeded 10 trillion won ($9.2 billion) this year, stoking concerns over potential default rates as the country already facing heavy loads of household debt, industry sources said yesterday.

The outstanding amount of overdue debts held by local mutual financing firms reached 10.6 trillion won as of the end of July, up 24.7 percent from 8.5 trillion won in January 2010, according to industry data and the Financial Supervisory Service (FSS).

Mutual financing companies in Korea refer to cooperatives set up to offer limited loans and deposit services aimed at supporting those working in specified industries, such as farming and fisheries.

In the wake of the domino-like defaults seen at local savings banks, and the central bank’s key rate cuts, individuals have shifted to mutual financing firms despite their slightly higher borrowing rates.

Market watchers say there is a high chance of loans souring due to the rapid pace of lending. Industry data showed the growth rate of precautionary loans rose to 3.1 percent as of June, compared to 2.5 percent in September 2010.

In a bid to cushion against possible defaults, the government is pushing for a measure to curb mutual financing firms’ lending.

The Financial Services Commission is in talks with the Ministry of Public Administration and Security to put a cap on lending to non-cooperative members, which would restrict it to one third of total lending.

However, the mutual financing firms oppose the move, claiming they need more leeway to invest.

Meanwhile, the index gauging the profitability of mutual financing firms has weakened largely due to the increase in overdue assets, with the return-on-asset ratio sharply declining to 0.48 percent in the first half from 0.76 percent a year earlier.

Yonhap