Preventing the spread of the PF insolvency

The bank run stoked by the jitters over the viability of the Korean Federation of Community Credit Cooperatives (KFCC) due to the soaring delinquency ratio has eased after the government took action. Withdrawals have subsided from last week. Last Friday alone, 3,000 have returned their money to their accounts with the credit cooperatives. The government has ensured that a minimum 50 million won ($38,000) in deposits will be guaranteed according to the law and that any amount exceeding it also will be covered even by transferring the assets and debts of troubled outlets of the cooperatives to sound ones.

Those who withdrew from the cooperatives earlier this month returned upon the promise that they would be guaranteed the rate terms of initial contracts and a tax deduction if they place their deposits back by July 14. The event underscores the importance of fast and persistent communicative efforts from the authorities to ease customer anxiety.

But the crisis is hardly over as the KFCC’s troubles remain. The delinquency rate against total loans with KFCC hit 6.18 percent, more than doubling the 2.4 percent average of its credit union peers. As many as 100 outlets fall under special supervision by the Ministry of the Interior and Safety due to a dangerously high delinquency ratio. Authorities plan to carry out restructuring of ailing outlets.

The bond market is still volatile. The credit finance sector, which includes the KFCC and the National Credit Union Federation, have dumped a net 3.2 trillion won worth of bonds from July 5 to 7. The KFCC is believed to have led the sale to raise capital. Bond yields have been rising at an alarming pace.

Soured project financing (PF) loans that troubled the KFCC could have a negative impact on other institutions. The delinquency rate in property-backed PF loans at mutual savings banks reached 4.07 percent in March, doubling from 2.05 percent in December. The credit rating of mutual savings banks is being slashed due to their exposure to PF loans. Korea Ratings has lowered its credit rating outlook on four major mutual savings banks to “negative,” citing their risk to exposures to property-backed PF loans.

The delinquency rate of property-backed PF loans in the non-banking financial sector soared to 2.01 percent by the end of the first quarter from 1.19 percent three months earlier. The fact that loan obligations cannot be met highlights the extent of the liquidity woes at construction sites. Many small and mid-sized builders are struggling with the liquidity crunch.

The KFCC crisis has boiled over from the lengthy slump of the Korean economy. The government has been incompetent in its oversight duty. It must do its utmost to prevent the insolvency of PF loans from spreading across the financial sector.