Change oversight for credit cooperatives

The Ministry of Interior and Safety, Financial Supervisory Service (FSS) and Korea Deposit Insurance Corporation (KDIC) have launched a two-week inspection of the Korea Federation of Community Credit Cooperatives (KFCC), also known as MG Community Credit Cooperatives. The probe is based on a coordination agreement between the ministry and the Financial Services Commission (FSC) struck in February after a community bank suffered a massive bank run due to its heavy exposure to project financing loans.

The new round of inspection was extended to 40 outlets from 20 following the controversy over a suspicious business loan taken out by a college-student daughter of Democratic Party (DP) candidate Yang Moon-seok running in a constituency in Ansan, Gyeonggi, to actually finance the family’s purchase of an apartment in an affluent neighborhood in southern Seoul.

A KFCC outlet in Daegu was separately investigated by the FSS together with its headquarters regarding the questionable loan. The FSS discovered illegalities involved in the loan and referred the matter to the police. The DP accused the FSS of interfering with the April 10 parliamentary elections by dispatching officials to the KFCC’s internal probe.

The DP could be offended by the swift FSS move involving one of its candidates. But since the FSS discovered other suspicious loans, its action prior to the election should not be condemned. FSS Governor Lee Bok-hyun made it clear that a business loan taken out for a housing purchase is illegal.

The KFCC is a community bank to support small merchants. It acts like any other cooperative bank. But because it falls under the jurisdiction of the Interior Ministry, its banking activities have escaped scrutiny by the financial authorities. Although the FSS and the ministry have an information-sharing partnership, a joint inspection is only possible upon the request of the ministry.

KFCC management has worsened since. Of 1,288 outlets, 431 suffered a deficit last year. One out of three outlets is in the red, a tenfold increase from 2022. As many as 80 outlets report a loan delinquency rate of over 10 percent. The poor state suggests lax internal risk management. The KFCC headquarters, which must keep watch on its outlets, is susceptible to political influence.

The KFCC’s deposits amount to 257 trillion won ($189.6 billion), 2.5 times larger than mutual banks. Its management should not fall under the Ministry of Interior, which has nothing to do with finance. A joint probe cannot be the answer. The time has come to make the FSS and FSC oversee the operation of our community credit cooperatives.