Exclusive: Wave of insolvency hits Korean Federation of Credit Cooperatives

KFCC faces historic rise in at-risk branches

As of the end of September, the number of Korean Federation of Community Credit Cooperatives (KFCC) branches classified as insolvent or at risk of insolvency surged to 131—more than doubling since June. The sharp increase follows the implementation of stricter feasibility evaluations for real estate project financing (PF), which led to a significant reclassification of PF-related bonds as non-performing loans, impacting branch solvency.

According to data released by the financial sector, an evaluation of the management status of 1,282 KFCC branches at the end of the third quarter revealed that 126 branches received a Grade 4 rating (vulnerable) and five were rated Grade 5 (high risk). The management evaluation system assigns grades from one to five based on overall performance, including profitability and asset quality. Grades 1 through 3 indicate sound or stable operations, while Grade 4 signifies branches at risk of insolvency, and Grade 5 is reserved for insolvent branches.

At the end of June, no branches had received a Grade 5 rating, and only 59 branches were rated Grade 4. This rapid growth highlights an alarming trend: in just three months, the number of Grade 4 branches increased by 67, and five branches were newly classified as Grade 5. Compared to the end of last year, when there were only 20 Grade 4 branches and none rated Grade 5, the surge underscores the severity of the current situation.

Customers wait to cancel deposit and savings accounts at a Korean Federation of Community Credit Cooperatives (KFCC) branch in Namyangju, Gyeonggi Province, on July 4, 2023. The branch, which had 60 billion won in non-performing loans, was merged with another branch on July 22, 2023./Jeong Min-ha

The unprecedented rise in the number of Grade 4 and 5 branches marks a historic development for the KFCC. Between 2018 and 2022, the number of branches in these categories remained between four and 11. In 2023, the figure climbed to 20 before escalating dramatically this year.

This surge stems from the simultaneous deterioration of asset quality and profitability among local branches. The KFCC reported that the sub-standard loan ratio—a metric indicating the proportion of loans at risk of default—has increased, weakening asset quality across the board.

Real estate PF-related non-performing loans have been particularly impactful. A key contributor to this rise is the stricter evaluation criteria for real estate PF projects introduced in June. The evaluation framework expanded from three to four stages, adding new categories for “caution” (C) and “at risk” (D). This reclassification led to a significant number of bonds tied to less viable projects being categorized as sub-standard loans.

The growth in sub-standard loans has also weighed heavily on branch profitability. Financial institutions are required to allocate reserves for bad debt losses, which increases expenses on financial statements and reduces net income. Local branches burdened by non-performing real estate PF loans had to set aside additional reserves, further straining their financial performance. These factors were reflected in third-quarter management evaluations, resulting in the dramatic increase in Grade 4 and 5 branches.

The rise in KFCC branch insolvencies mirrors broader challenges in South Korea’s real estate financing sector, where tighter regulations have exposed underlying vulnerabilities.

KFCC is aware of the escalating number of struggling branches and has started implementing countermeasures. A KFCC official stated, “We are guiding local branches to reduce the scale of corporate loans and establish crisis response plans tailored to each branch.” The KFCC has also partnered with United Asset Management Corporation (UAMCO) to create a 500 billion won fund aimed at normalizing real estate PF projects.

[Kim Tae-ho]

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