Delinquent loan balances at South Korea's largest MG Community Credit Cooperatives fell by nearly 871 billion won ($620 million) over the past year. The credit unions narrowed their losses by selling non-performing loans and winding down real estate project financing sites. Given that the cooperatives are carrying out aggressive restructuring by shrinking both lending and deposits, some forecasts suggest a significant number of them could return to normal operations next year.
Delinquent loan balances at the 100 largest credit unions by assets totaled 4.37 trillion won as of the end of June, according to financial industry data on the 5th. That marks a decline of 870.8 billion won, or 16.6%, from a year earlier.
Delinquency rates at individual cooperatives also improved. Among the 100 largest by assets, 14 — including Seoul Mirae in Seoul's Seongbuk district — saw their delinquency rates fall more than 5 percentage points from a year earlier as of the end of June.
All five largest regional credit unions by assets posted improved delinquency rates. At Wonkwang MG Community Credit Cooperative, the largest with 2.31 trillion won in assets, the rate fell 0.54 percentage points to 3.41% at the end of June from 3.95% a year earlier. At Goyang Dongbu, the second largest with 2.10 trillion won, the rate dropped to 7.75% from 12.68%, while Seongnam Jeil, with 1.66 trillion won, fell to 9.95% from 13.81%. Deojoeun, with 1.47 trillion won, and Seongnam Dongbu, with 1.29 trillion won, saw declines of 4.58 percentage points and 2.79 percentage points, respectively.
The drop in delinquent loans reflected aggressive sales of non-performing loans and public auctions of project financing sites. In July last year, the MG Community Credit Cooperatives established MG Asset Management Co. (AMCO), a firm specializing in bad-debt management, to diversify its channels for selling non-performing loans. One financial industry official said the credit cooperatives began unwinding project financing exposure relatively early among mutual finance institutions and have made comparatively more progress in selling troubled sites.
Improvement also showed up in the management assessment conducted by the Korean Federation of Community Credit Cooperatives, which evaluates individual cooperatives on soundness, profitability and capital adequacy. Among the top 100, the number rated grade 1 or 2 — excellent or good — rose by 16 to 51 at the end of June from 35 a year earlier, meaning more than half of those analyzed fell into the upper grades. By contrast, the number rated grade 4 or 5 — weak or at risk — rose by four.
Losses also narrowed. The top 100 cooperatives posted a combined net loss of 277 billion won in the first half, down 171 billion won, or 38.2%, from 448 billion won a year earlier. According to the Ministry of the Interior and Safety, all 1,239 MG Community Credit Cooperatives recorded a combined net loss of 676.8 billion won in the first half, a decrease of 651.9 billion won from 1.33 trillion won a year earlier.
The cooperatives have been pursuing an especially aggressive reduction in assets since last year. Deposit balances, which had swelled to 260.86 trillion won as of the end of July last year, fell steadily to 255.26 trillion won at the end of last year and then to 242.30 trillion won at the end of July this year.
Lending is shrinking as well. Loan balances, which had grown to 184.27 trillion won as of the end of March, declined to 180.94 trillion won by the end of July.
Financial firms generally need loan growth at least in line with economic growth and inflation. Profits and expansion depend on taking in deposits and lending them out. On that basis, industry observers view the credit cooperatives as undertaking a painful restructuring of their balance sheets. If the trend holds, the number of cooperatives returning to normal operations is expected to rise sharply next year.
Challenges remain. Of the 100 largest cooperatives by assets, 60 posted a net loss in the first half, and eight of those have eroded capital. An official at the Korean Federation of Community Credit Cooperatives said the organization would work through continued management reforms to normalize operations across all cooperatives as quickly as possible.
