Mutual finance is at a crossroads as tighter regulation of real estate project financing (PF) threatens its survival. Its past growth model, which expanded assets mainly through corporate loans tied to real estate, has been constrained. The sector now needs to shift its focus to regional and low-income finance that the authorities have emphasised. The industry is calling for a relaxation of household loan rules, especially outside the capital region, to secure a stable earnings base first.

Under revisions to the mutual finance supervisory rules recently approved by the Financial Services Commission, real estate PF loans by mutual finance cooperatives will be capped at 20 percent of total lending from April 1, 2027. The combined total of lending to the real estate and construction sectors and PF loans also cannot exceed 50 percent of total lending.

Soundness rules will also be tightened. The net capital ratio requirement against total assets will rise to 2.5 percent in 2028, 3 percent in 2029, 3.5 percent in 2030 and 4 percent in 2031. For mutual finance, this means cutting real estate lending while also cleaning up bad assets and building capital.

That makes it inevitable to revise the growth model that has relied on corporate loans linked to real estate. With mutual finance finding it difficult to compete with banks in the household loan market, it has used relatively higher-margin corporate and real estate lending as a key pillar of asset growth.

But as the real estate market weakens, delinquency burdens have grown. With lending caps now also in place, its capacity to expand assets under the old model will shrink further.

Expanding the role of local finance, calls for easing rules outside the capital region

The direction the authorities are demanding is to strengthen mutual finance's original role for local residents, small merchants and financially vulnerable groups. It would use its local branch networks to supply living expenses and small business funding in areas where banks do not sufficiently reach.

The problem is that a stable earnings base is also needed to keep supplying local and low-income finance. Mutual finance has fewer sources of non-interest income than banks. After cutting property loans such as PF, it also lacks clear alternatives for deploying funds raised from deposits.

In this context, the mutual finance sector is calling for household loan rules to be adjusted, particularly outside the capital region. It argues that uniform rules are less appropriate than regulation that reflects regional characteristics, given differences in real estate and financial conditions between the capital region and other areas.

The authorities are also reviewing ways to offer regulatory incentives, such as on loan-to-deposit ratios and limits on lending to non-members, to mutual finance cooperatives that expand non-capital-region and low-income lending. This is separate, however, from directly easing household loan rules such as loan-to-value (LTV) ratios or debt service ratio (DSR) requirements.

Some in the sector say there is a need to broadly review household loan rules to fit mutual finance, including differentiated LTV standards, regulation outside the capital region and DSR requirements.

Kim In (김인), chairman of MG Community Credit Cooperatives, also mentioned at an on-site meeting in May attended by President Lee Jae-myung that there is a need to apply different LTV standards for the secondary financial sector and for banks. MG Community Credit Cooperatives plans to provide 200 billion won in loans outside the capital region by 2030. The industry views that regulation reflecting financial conditions outside the capital region should also proceed in parallel to support such an expansion of local finance.

A challenge is that if easing household loan rules focuses only on expanding mortgage lending, it could amount to filling PF reductions with other real estate-backed loans. In the end, for mutual finance to strengthen its original role in regional and low-income finance, it will likely need to diversify earnings sources along with financing for end users outside the capital region.

A mutual finance official said, "Since mutual finance has a relatively limited earnings structure compared with banks, it is right that a stable earnings base must also support continued financial assistance for low-income people and small merchants." The official said, "Strengthening its core role and securing profitability are not conflicting goals, but two pillars for sustainable low-income finance."