Mutual savings banks

A mutual savings bank (상호저축은행, 저축은행) is one of the non-bank depositary institutions. Until the early 1970s, the general public and small companies had only to rely on informal finance and private funds. So the government had to transform such private finance into public financial systems.

Key words
mutual savings bank, depositary institutions, credit gye

History
Mutual savings banks were created with enactment of the Mutual Savings and Finance Company Act (상호신용금고법), one of the three laws that took the lead in carrying out the August 3 Emergency Economic Measures of 1972 (8ㆍ3 긴급경제조치) designed to revamp the private money market and draw private lending facilities into a more organized financial setting. As the Mutual Savings and Finance Company Act was amended to the Mutual Savings Banks Act (상호저축은행법) in March 2001, mutual savings and finance companies were renamed mutual savings banks (상호저축은행). Until then, to access finance, the general public and small companies had to rely on mujin (무진 無盡), a common form of informal finance, or on popular funds. However, reckless management and the challenges inherent to small-scale business led to a series of bankruptcies, inflicting heavy damage on customers and degrading the financial order.

Against this backdrop, the government introduced a new scheme for mutual savings banks, as part of efforts to protect customers by incorporating private lenders into the financial landscape and rationalizing their businesses, as well as fostering financial institutions dedicated to the underprivileged and to small companies having low credit ratings and sound solvency.

In the early phases of their establishment, problems with insolvency arose at some savings banks. However, a raft of measures designed to bolster public confidence in them, including the introduction of a risk-based capital system and the strengthening of governmental guidance and supervision, together with a variety of promotional policies, contributed to the laying of a foundation enabling these banks to succeed as local financial institutions.

Consequently, while holding unfavorable positions compared to commercial banks in terms of their capital, human resources and public confidence, savings banks went on to grow amid ongoing surplus demand for capital in the financial markets and on the strength of a favorable management environment created by the differences in regulation of their interest rates compared to those of commercial banks.

By the 1990s, however, as financial liberalization and market opening progressed, this positive environment for mutual savings banks rapidly disintegrated. After the Asian currency crisis of 1997, a string of regional small- and medium-sized corporate insolvencies exacerbated managerial difficulties, resulting in the bankruptcies of a great number of mutual savings banks.

Deregulation but Savings Banks Fiasco
In an effort to promote their operation and enhance public confidence in them, the financial authorities amended the Enforcement Decree of the Mutual Savings and Finance Company Act and then the Act itself ― in June 2000 and March 2001, respectively. Mutual savings and finance companies were in line with this renamed mutual savings banks, the restrictions on their business areas and requirements for their establishment of branch offices were eased, their business scopes were expanded, and their single-borrower credit ceilings were raised.

The minimum capital requirement was on the other hand doubled, outside directors and audit committees were introduced, and the requirement for allowing minority shareholders to exercise rights was eased. In May 2006, an amendment of the Enforcement Decree of the Act allowed robust savings banks to relax their regulations on single-borrower credit ceilings. Such deregulation as an impetus to hone the competitive edges of savings banks continued to be pursued.

Against this deregulatory backdrop, some savings banks focused on external expansion and risky real estate project financing, and the depression of the real estate market in the aftermath of the global financial crisis of 2008 hurt savings bank performance. Coupled with the moral hazard of majority shareholders and management, eight savings banks including Busan Mutual Savings Bank and its affiliates were ordered to suspend operations in 2011.

Initially in late 1972, the number of mutual savings banks reached 350, but it afterward declined to 192 by late 1980 as non-performing savings banks were realigned and consolidated and the establishment of new institutions was restricted. During the period from July 1982 to November 1983, a total of 58 savings banks were established, but after 1997 when the Asian currency crisis drove a large number of mutual savings banks into liquidation or merger, the number plunged, to stand at 105 as of end-June 2011 from 231 at end-1997.

After nationwide examination of the whole mutual savings banks in 2011, a number of mutual savings banks and their affiliates were ordered to suspend operations in 2011. Massive restructuring of mutual savings banks including mergers and P&As (meaning 'Purchse' of good assets within the scope of 'Assumption' of deposit liablilities) was followed.

Businesses
The key businesses of mutual savings banks involve:
 * receipts accruing from credit fraternities, credit installments, demand deposits or installment deposits;
 * lending;
 * discounting of bills;
 * domestic and foreign exchange transactions;
 * separate safekeeping;
 * execution of collection and payment as agents;
 * serving as brokerages, intermediaries or agents for corporate mergers and acquisitions;
 * together with execution of business on behalf of the government, public organizations or financial institutions.

In the beginning, the businesses of mutual savings banks were restricted to the affairs of credit fraternities, credit installments, microcredit through installment redemption, and bill discounts targeting fraternity members or installment depositors. Currently, however, they handle businesses similar to those of other banking institutions.

Concerning their deposit business, mutual savings banks in the past executed mainly the collection of fraternal dues and credit installments. In 1995, however, in replacement of common and term installment deposits these financial institutions were allowed to handle demand and time deposits, making the receipt of demand and installment deposits their main business.

In terms of their lending, mutual savings banks grant loans on bills and bill discounts as basic services, as well as handling installment loans linked to deposits, loans secured by deposits and installment savings, consumer loans, and loans for employee housing.

Supervision and Regulation
Mutual savings banks have been placed under strict regulations regarding their businesses ― with the aim of enhancing public confidence in them, maintaining their sound management, and preventing them from being utilized for private finance.

First of all, these financial institutions have been prohibited from extending loans or temporary payments to any investors holding more than two percent of their invested capital, to members of their management, and to those having special relationships with the savings banks concerned. They are further prohibited from engaging in cross-lending activities, such as extending loans or temporary payments to investors in other mutual savings banks in attempts to evade the previously-described regulations. The credit ceilings on individual borrowers may in addition not exceed 20 percent of their equity capital, and securities should be held and borrowed within the limits of an amount equivalent to their equity capital.

In 2004, a limit on the extensions of credit allowed to individual borrowers was introduced, in order to restrict the numbers of loans extended to individual borrowers and those sharing credit risks with them to less than 25 percent of equity capital.

In addition to those regulations, as part of efforts to achieve the goal of mutual savings bank establishment ― in order for them to promote microfinance as financial institutions for lower income households ― these banks are required to extend more than a fixed portion of their total loans to individuals and small- and medium-sized companies within their business areas.

The aggregate of loans extended to individual borrowers that exceed ten percent of a mutual savings bank’ equity capital may not exceed five times its equity capital. Furthermore, the institutions are required to hold, as reserves for payment, funds equivalent to within 50 percent of their total sums of installments, demand deposits and installment deposits, as regulated by the Financial Services Commission.

Nationwide Organization
The Korea Federation of Savings Banks (KFSB 저축은행중앙회) is a non-profit corporation embracing mutual savings banks as its members. Its key functions are:
 * conducting research and investigations,
 * establishing cooperative relationships among mutual savings banks,
 * performing promotional activities designed to bolster a sound credit order and protect customers,
 * accepting and managing depository receipts and deposits for reserve requirements from savings banks,
 * providing savings banks with services such as loans and guarantees,
 * purchasing bills held and sold by savings banks,
 * conducting domestic exchange transactions, and
 * undertaking tasks commissioned to it by the government, public organizations or financial institutions.

Since 1999, additional functions have included the public offering, underwriting and sales of securities as well as the establishment and management of affiliates or investment in other companies.

The KFSB is further involved in standardization and guidance activities with regard to accounting and businesses at mutual savings banks, and conducts training programs for executives and employees of these banks while engaging in a range of other projects designed to achieve their mutual objectives.

Sources and Uses of Funds
Mutual savings banks generally raise their funds through time deposits. Using these funds, they are able to extend general purpose loans, bill discounts and installment loans.

Regarding their fund-raising, time deposits accounted for 75.4 percent of total mutual savings bank funds as of end-June 2011. Mutual time deposits and mutual installment deposits, the major means of raising funds at mutual savings banks until the 1980s, now make up only a tiny percentage. In terms of fund management, general purpose loans top all dispersals at 53.6 percent. The installment loans that accounted for the largest portion at 48.1 percent in late 1990 have now plummeted to account for only 0.3 percent. This is because mutual savings banks have focused lately on general purpose loans including real estate PF loans, in order to enhance their profitability. It has in addition been found that they invest 13.8 percent of their total funds in securities.