MG Community Credit faces emergency measures amid soaring default rates

A signboard for the Korea Federation of Community Credit Cooperatives, also known as MG Community Credit Cooperatives / Yonhap

By Lee Yeon-woo

The government has initiated emergency measures for the Korea Federation of Community Credit Cooperatives (KFCC), also known as MG Community Credit Cooperatives, in response to rising public concerns over its record-high delinquency rates, with some branches even reporting a 20 percent default rate.

The Ministry of the Interior and Safety, which oversees the federation, will conduct joint special inspections at 30 branches, potentially recommending closures or mergers if necessary. Starting next Monday, these inspections will be carried out by officials from the interior ministry, the Financial Supervisory Service (FSS) and Korea Deposit Insurance Corporation (KDIC).

The ministry's goal is to reduce the delinquency rates to below 4 percent by the end of this year, down from the current rate which hovers around 6 percent.

“Despite some KFCC branches experiencing increases in default rates, the credit cooperative's soundness remains reliable. This is especially the case given that the overall default rates in the financial industry are rising, while KFCC's default rates have been trending downwards since mid-June,” the interior ministry explained during a media briefing held on Tuesday.

These special measures were introduced as public concerns intensified over whether ripple effects from KFCC's delinquency rates could further impact the entire financial industry.

According to the ministry, the overall default rate rose to 6.4 percent as of June 21, a sharp increase from the 1.93 percent recorded in 2021. The default rate for corporate loans recorded 9.99 percent as of March, more than quadrupling in five years.

The possibility of a bank run has also surfaced as some worried customers withdraw their deposits from the bank. From February to April, around 7 trillion won in deposits were withdrawn, decreasing the total deposits to 258 trillion won from 265 trillion won.

The primary risk for insolvency stems from KFCC's active lending to the real estate business, even as the market slumped last year due to an economic slowdown and increases in the key interest rate.

In response to the growing concerns, the government has sought to reassure customers, stating that they will not be significantly affected even if their branch is closed or merged with another. Deposit insurance coverage guarantees that KDIC can refund deposits of up to 50 million won per person at each financial institution in the event of bankruptcy or business suspension.

“We have an additional 2.6 trillion won set aside to protect our customers even in an emergency,” said Park Jun-cheol, a senior official from the KFCC.