A branch of one of Korea’s biggest such lenders, MG Community Credit Cooperatives, was shut last month when it reported a 60 billion won loss on real estate-related loans. That triggered deposit outflows at the group of lenders on concerns over rising default rates.
Policymakers in Korea acted to prevent the credit union troubles from spreading, with the central bank and Yoon Suk Yeol’s government making more than $100 billion worth of funds available to the credit and property markets. That helped stabilize investor sentiment, but the recent widening in some lenders’ credit yields is a sign of lingering concern.
The sheer size of the lenders elevates risks: more than 1,200 of their branches dot the landscape and over 40% of Korea’s population use their services each year, according to the interior ministry, which supervises the firms. Their total assets have nearly tripled in the past decade to 284 trillion won last year, as tax benefits and higher interest rates than bank deposits lured investors.
The government has sought reform in the past, citing instances of embezzlement and a lack of proper oversight and governance, according to the interior ministry. It didn’t brighten investors’ mood that prosecutors requested a warrant to arrest Park Cha-hoon, head of the de facto central bank for the credit unions, over bribery allegations, though a Seoul court rejected the request.
Policymakers wrote laws to authorize the firms to take deposits and offer loans, and set up headquarters in Seoul to support the expansion of their lending and insurance operations. MGCCCs financed projects such as nurseries, arts and sports centers. as well as backing working-class families and mom-and-pop stores.
Korea has the developed world’s highest household debt-to-gross domestic product ratio at 157% if the about $800 billion in jeonse is counted.