Now chaos from the credit cooperative

One of the oldest credit unions in Korea is struggling with liquidity woes and bank run due to soaring default in loans. The delinquency ratio of the Korean Federation of Community Credit Cooperatives (KFCC) amounted to 6.49 percent last month, nearly doubling the 60-year-old institution’s delinquency ratio of 3.59 percent seven months ago. Other cooperatives with financial role such as the National Federation of Agricultural Cooperatives (Nonghyup) and the Fisheries Cooperatives (Suhyup) and the National Credit Union Federation of Korea (Shinhyup) reported their combined delinquency ratio of 2.42 percent in the first quarter. As much as 7 trillion won ($5.4 billion) were withdrawn from the KFCC from March to April over jitters about its viability.

Authorities came up with a plan to specially monitor the shaky credit union. A government task force was set up among the Ministry of the Interior and Safety, the Ministry of Economy and Finance, the Financial Services Commission, the Financial Supervisory Service, and the Bank of Korea. The government claimed the crisis was manageable despite the worrisome delinquency ratio, citing the relative health of the financial condition of KFCC.

The government nevertheless must come up with a fundamental solution to the KFCC crisis. Transparency of its business must be heightened. The institution is the largest in the mutual savings industry with assets of 284 trillion won and 22.62 million account holders. But the KFCC does not regularly report basic information such as delinquency ratio or outstanding deposit balance. Lack of information disclosure has aggravated the instability.

The KFCC was created to serve the working class. As license to its business is issued by local administrations, it falls under the jurisdiction of the Ministry of the Interior and Safety. As a result, it remained outside the supervision of financial authorities.

Project financing loans have been regulated since last year, when the real estate market turned sluggish. But property-backed project financing at the KFCC only increased. Much of the fault for those credit cooperatives’ woes can be attributed to the slack supervision by the ministry. Whether the ministry is qualified to oversee the KFCC should be reexamined.

More than half of loans extended by the KFCC went to companies, mostly backed by their real estates. Although the institution was created to serve the working class, it had been engrossed with property-backed loans for immediate gains. Yet the ministry turned blind eye to the practice. To consumers, the KFCC is like any other financial institutions. But keeping a separate supervisor is not right. A closer study is required to examine whether dealmaking is behind the preferential treatment.