More than 1,200 MG Community Credit Cooperatives across South Korea reported a combined loss of nearly 1.7 trillion won ($1.2 billion) last year, marking the largest deficit in the institution’s history. The steep downturn was primarily driven by deteriorating real estate project financing (PF) loans amid a sluggish property market in provincial areas, prompting a sharp increase in provisions for bad loans. Some financially troubled credit unions are now facing the risk of bankruptcy due to stalled merger proceedings.
According to financial industry sources on Feb. 28, a total of 1,276 MG Community Credit Cooperatives branches posted a net loss of 1.7 trillion won ($1.2 billion) in 2024. After incurring a 1.2 trillion won ($825 million) loss in the first half of the year, the cooperatives suffered an additional 500 billion won in losses in the latter half. The deficit marks the largest in the organization’s history. MG Community Credit Cooperatives had previously recorded a net profit of 1.5 trillion won ($1 billion) in 2022 and 86 billion won ($59.17 million) in 2023, but profitability deteriorated sharply last year. Approximately 90% of the credit unions reported losses, with only 10% remaining in the black.
The sharp losses were largely attributed to increased provisions for bad loans. Financial institutions are required to set aside reserves to cover potential loan defaults, which are recorded as expenses on financial statements. The higher the provisions, the lower the reported profit.
The surge in loan-loss provisions stemmed from mounting risks in real estate PF loans. Financial institutions assess the viability of PF projects, classifying them as either “caution” (C) or “at risk of default” (D) when financial concerns arise. When a project is downgraded to these categories, institutions must either allocate reserves equivalent to their exposure or liquidate the project. As of September 2023, MG Community Credit Cooperatives and other credit unions had a combined exposure of 10.9 trillion won ($7.5 billion) to C- and D-rated real estate PF projects—nearly half of the 22.9 trillion won ($15.7 billion) in total exposure reported across all financial institutions. MG Community Credit Cooperatives have been particularly vulnerable due to their lending focus on small-scale projects in non-metropolitan areas. As property markets in these regions weakened, many of these projects faced severe financial strain.
The deepening losses have also complicated merger efforts for struggling branches. Some financially distressed credit unions have been designated for mergers with healthier counterparts, but the process has been hindered by a lack of consensus. Mergers require approval from both the failing branch and the acquiring entity, and with the number of troubled branches increasing, solvent cooperatives have grown hesitant to take on additional liabilities. As a result, the merger process has slowed significantly.
Credit unions that fail to secure a merger could face bankruptcy if their financial standing continues to deteriorate, raising concerns among depositors about the security of their funds. An MG Community Credit Cooperatives employee explained, “If a branch goes bankrupt, customer deposits exceeding the 50 million won ($34,400) insurance limit may be used to offset losses, while investment-type equity contributions are not protected.”
Despite these concerns, the Ministry of the Interior and Safety and financial regulators have sought to reassure depositors, emphasizing that customer funds remain secure. A ministry official stated, “The government and the Korean Federation of Community Credit Cooperatives have no plans to allow any regional branches to fail. Troubled branches will be merged to safeguard customer deposits and equity contributions.”
