The mutual finance sector is facing increased pressure to secure deposits as its total deposits have decreased by over 29 trillion won this year. With the reduction of tax benefits on deposits and heightened interest rate competition among financial institutions, the sector's ability to attract deposits has weakened. Additionally, the total loan volume is constrained by household loan regulations, making it difficult to expand lending operations. Raising interest rates to prevent deposit outflows could increase funding costs, while also limiting the potential for increased interest income from loans, raising concerns about profitability.
According to statistics from the Bank of Korea, as of the end of July, the total deposits in the mutual finance sector, including Saemaul Geumgo and credit cooperatives, stood at 901.566 trillion won, a decrease of 29.295 trillion won from the end of last year (930.861 trillion won). Compared to the previous month (903.415 trillion won), this represents a decline of 1.475 trillion won.
In contrast, commercial banks and savings banks have seen an increase in deposits. As of the end of July, the total deposits in commercial banks reached 2,244.763 trillion won, an increase of about 96 trillion won since January. The total deposits in savings banks also rose to 105.214 trillion won, marking the highest level in two years and seven months since December 2023 (107.149 trillion won).
The decline in deposits within the mutual finance sector is attributed to a strong stock market and weakened deposit competitiveness. Analysts suggest that the KOSPI index, which surged over 101% in the first half of this year, has drawn investors seeking higher returns in the stock market rather than in deposits.
The reduction in tax benefits on deposits has also added to the burden. Starting this year, members and quasi-members of mutual finance organizations with a total salary exceeding 70 million won will face a 5% tax rate on interest income from deposits, increasing to 9% next year. Previously, interest income on deposits up to 30 million won was exempt from taxation, regardless of income level.
As major banks and savings banks have raised deposit interest rates, the mutual finance sector's competitiveness in this area has diminished. As of July, the interest rate for one-year fixed deposits at Saemaul Geumgo and credit cooperatives ranged from 3.57% to 3.62%, which is lower than the average rate of 3.78% for savings banks and comparable to the rates of the five largest banks, which range from 3.5% to 3.65%.
The challenge lies in the fact that even if interest rates are raised to secure deposits, it is difficult to offset the increased funding costs with expanded loan income. Household loans are subject to total volume management by financial authorities. In the first half of this year, household loans from Saemaul Geumgo increased by 24 trillion won, while credit cooperatives saw an increase of 14 trillion won. The total increase among these three mutual finance institutions, including regional agricultural cooperatives, reached 113 trillion won. Although authorities adjusted the total volume targets in September to allocate additional limits, any expansion in lending must remain within the revised target range.
Regulations on corporate loans related to real estate are also tightening. Starting in April next year, the mutual finance sector will be required to manage real estate project financing (PF) loans to no more than 20% of total loans. The combined proportion of loans for real estate and construction, including PF loans, will also be limited to 50%. With limits now applied to both household and real estate-related corporate loans, there may be increased constraints on fund management.
A financial sector official stated, “The mutual finance sector faces challenges not only from the pressure of interest rate competition to prevent deposit outflows but also from restrictions on fund management due to total loan volume regulations. In a situation where the deposit base is weakening, new avenues for securing profitability must be established.”
* This article has been translated by AI.
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