[Yoo Choon-sik] Saemaul Geumgo and trust in financial system

Some of the business irregularities involving MG Community Credit Cooperatives, better known as Saemaul Geumgo within the country, have again grabbed media headlines in recent weeks, even as their stretched exposure to the depressed real estate market remains a potential risk to South Korea’s financial stability.

The Korea Economic Daily and other local media reported that Saemaul Geumgo cooperatives paid out some 500 billion won ($367 million) in dividends to their members last year, more than four times their combined net profit of 86 billion won, which represented a huge 94 percent decline from the previous year.

There were almost 1,300 Saemaul Geumgo cooperatives across the country, each operating as an independent organization but under the supervision of a nationwide organization called the Korean Federation of Community Credit Cooperatives. They undertake banking-like business operations but are treated as non-bank, non-profit entities incorporated under separate laws.

While not in violation of laws or regulations, the move drew criticism from major media outlets because Saemaul Geumgo managed to overcome a crisis last year with outside help. The government offered guarantees on deposits at Saemaul Geumgo exceeding the usual 50 million won per person, and the government-run Korea Asset Management Corp purchased 1 trillion won worth of bad assets from them.

The Ministry of the Interior and Safety, which supervises Saemaul Geumgo, said in a statement that the dividend payout was not a violation of regulations because they had 4.2 trillion won in reserves. Still, it admitted controversy about the dividend payout made by over 400 cooperatives that posted net losses in 2023, promising to strengthen the supervision of the community cooperatives.

Unlike most banks and non-bank financial companies, Saemaul Geumgo cooperatives are not subject to supervision by the Financial Supervisory Service or the Bank of Korea. Instead, they are under the supervision of the government, notably the Ministry of the Interior and Safety and the Ministry of Economy and Finance.

This unusual structure is related to the origin of Saemaul Geumgo, which began with five cooperatives established in South Gyeongsang Province in the early 1960s with a mission to support community-level development activities. The government recognized their operations and provided various support measures, allowing them to conduct small-scale credit business operations among members.

Saemaul Geumgo cooperatives have already been at the center of various scandals. Earlier this year, former and current employees were sentenced to prison terms in two trials for defrauding customers. There was also a case where a new employee changed a customer's password and stole money from the customer’s account.

A Saemaul Geumgo branch was involved in a loan scandal related to a candidate during the April 10 parliamentary election campaign period. Many other cases of fraudulent and bad loans, embezzlement, workplace bullying and sexual harassment have been reported by local media in relation to Saemaul Geumgo branches.

The biggest problem with Saemaul Geumgo is the structure in which the chair of the board of directors at each cooperative wields absolute power over personnel and budget affairs. A chair is allowed to serve no more than three four-year terms successively, but many chairs across the country effectively serve almost indefinitely using tricks, according to local media reports.

The Financial Services Commission and the Ministry of the Interior and Safety have agreed to strengthen supervision over Saemaul Geumgo cooperatives, but there has been no clear progress reported so far in their efforts. The Ministry of Interior and Safety is not naturally an organization designed to supervise financial businesses and reportedly has very few employees specifically in charge of credit cooperatives.

Although most of the scandals reported about Saemaul Geumgo cooperatives or their employees are not serious or massive in scale, they can cause a critical turn in trust, not only among customers with the cooperatives themselves but also among investors both at home and abroad toward South Korea’s financial system and capital markets.

While many cooperatives are small in size and operations, their combined assets amounted to as much as 287 trillion won at the end of 2023, including 188 trillion won in outstanding loans. Moreover, their asset quality has continued to deteriorate despite various government support measures as the country’s economy slowed and the real estate market remained in a slump.

Their combined loan delinquency ratio jumped to 5.07 percent by the end of 2023 from 3.59 percent at the end of 2022, according to data from the Ministry of the Interior and Safety, led by an upsurge in the delinquency ratio on loans owed by corporate borrowers to 7.74 percent from 5.61 percent over the period. Their non-performing loan ratio also rose sharply to 5.55 percent by the end of 2023 from 3.05 percent a year before.

The deteriorating asset quality at Saemaul Geumgo cooperatives is especially worrying because South Korea’s financial industry as a whole is grappling with sustained problems with real estate project-financing loans. A small scandal at a credit cooperative may not cause a huge crisis across the country, but a slight worsening in trust among investors toward the country’s financial system can still trigger significant problems.

Yoo Choon-sik

Yoo Choon-sik worked as the chief Korea economics correspondent at Reuters and is now a business and media strategy consultant. The views expressed here are the writer’s own. -- Ed.