Agricultural Finance and

Agricultural Cooperative Financial System

in Korea

Kyoung-Soo Chang , Ph. D.

Vice President
Nonghyup College
Korea

November 2002
 CONTENTS

I. Introduction

II. Operational System

III. Performance

IV. Strategies for Competitiveness

V. Complementary Schemes

VI. Conclusion
 I. INTRODUCTION

Commercial Bank : Return on Ag. Inv. :

Capital Rationing Relatively Low

To Solve Farmer’s Financial Needs

To Set up To Provide
Fin. Institutions Policy Loan

HOW?
 II. OPERATIONAL SYSTEM

NACF : National Agricultural Cooperative Federation

AC : (Primary) Agricultural Cooperative Federation
MC : Mutual Credit (AC’s Financial Business)
BOK : Bank of Korea
THE GRAND STRATEGY OF KOREAN AG. FINANCE

1950s 1961 Around 1970

Cooperative-Based
Financial System

The The National Level Primary Level

Agricultural Agricultural
Bank Bank NACF Ag. Coops
(1956) (1958) (multi-purpose) (multi-purpose)
Private Bank Gov’t Bank
Bank Mutual
merged
Credit Inst.
Non Financial
Cooperative Org. Private Coop Bank /
Ag. Finance Institution
 ORGANIZATIONAL PICTURE

NACF Headquarter

Central Office for Central Bank for

NACF - Bank AC - MC

AC/ AC/ AC/

MC MC MC

Branches Branches
 COMPARISON OF FINANCIAL BUSINESSES
(2001)
NACF-BANK AC-MC
Organization Law Agricultural Agricultural
Cooperative Law Cooperative Law
Business Law Bank Law Credit Union Law
Category Specialized Bank Credit Cooperative
Institution
Business Scope Commercial Bank Simpler than Bank
+Agricultural Bank
Business Region Nation-Wide Specific Region
(Urban Area) (Rural Area)
Number of Institutions 1 1383
Number of Offices 868 4068
Shareholders ACs Farmers
 FINANCIAL INSTITUTIONS OF KOREA
(2001)
CLASSIFICATION NUMBER
Commercial Nationwide Commercial Banks 11
Bank Local Banks 6
Foreign Bank Branches 43
Banking Specialized The Korea Development Bank 1
Institutions Bank The Export-Import Bank of Korea 1
The Industrial Bank of Korea 1
The Credit and Banking Sector of NACF 1
The Credit and Banking Sector of NFFC 1
Merchant Banking Corporations 4
Non-Bank Mutual Savings and Finance Companies 125
Depository Credit Credit Unions 1,280
Institution Cooperative Mutual Credit Facilities 1,600
Institutions Community Credit Cooperatives 1,770
Postal Savings 1
DIVERSE FUNCTIONS OF NACF

• A Bank Agricultural Bank

Commercial Bank

• Central Bank for AC-MC

• Federation of ACs

• Headquarter for Other Business

 AGRICULTURAL FINANCE

Agricultural
Gov’t NACF - BANK Finance
System
BOK
AC - MC
Interest
Compensation
Agricultural Policy Loan
Including
With
NACF and/or
Gov’t & BOK
MC Funds
Funds Only
(Pooling)

Farmers / Agri-Business
 POOLING FUNDS : EX. OF SHORT-TERM LOAN

(2000)

Interest
From Amount Interest Rate
Compensation
1,659
Government 5.75% 0.75% + 1%
(43.7%)
1,961
NACF-Bank 11.11% 6.11%
(51.6%)
180
AC-MC 11.73% 6.73%
(4.7%)
3,800
Total
(100%)
• For Gov’ts Funds, administration fee of 1% is provided with
Agricultural Cooperative System
 CREDIT GUARANTEE SYSTEM

Managing Institution NACF

Contributed by Gov’t, NACF, NFCF

Loans for Agriculture,

Target Loans
Fisheries
Individual : 1 Billion Won
Max. Guarantee
Agri-Business : 1.5 Billion Won

0.2% - 1.0% per annum

Guarantee Premium
According to Credit Rating
III.PERFORMANCE
 ANNUAL GROWTH RATE OF DEPOSITS

’80- ‘85 ’85-’90 ’90-’95 ’95-2001

AC-MC 23.2% 29.6% 19.8% 18.0%

NACF-Bank 16.8% 24.5% 14.1% 18.7%

BANK Avg. 10.4% 24.3% 10.6% 12.4%

RANKING OF DEPOSIT AMONG FIN. INDUSTRY

2001 (bil. won)

NACF + AC 160,544
(NACF) (76,653)
(AC) (83,891)
KOOKMIN BANK 134,901
WOORI BANK 60,965
CHOHUNG BANK 42,839
KOREA EX BANK 38,647
 MARKET SHARE AMONG EACH INDUSTRY

Market Share Rank

Deposits 12.9% 2

NACF-Bank Loans 13.7% 2

Credit Card 19.0% 2

Deposits 43.6% 1
AC-MC
Loans 53.3% 1
 FARMERS’ BORROWING BY SOURCE (%)

FARM 1980 1990 2001

NACF & ACs 48.7 81.5 85.8

Other Inst. 2.4 4.7 9.4

Money Lenders 49.0 13.8 4.8

Total 100.0 100.0 100.0

 NON-PERFORMING LOAN RATE

2000 2001
NACF-Bank* 3.43% 2.63%
AC-MC** 4.52% 3.25%
* Substandard Loan + Doubtful Loan + Presumed Loss
** Ratio of Loans overdue more than 1 year

BIS CAPITAL RATIO

2000 2001
NACF-Bank 10.20% 10.26%
AC-MC 7.73% 8.82%
EXPANSION OF AGRICULTURAL POLICY LOANS

Billion Won
25000

20000

15000

10000

5000

0
1980 1985 1990 1995 2000
Short-term Funds Long-term Funds Total
 NET PROFIT BY BUSINESS OF AC

(Million Won)
’99 2001
MC 792 915
Purchasing -174 -176
Marketing -99 -127
Insurance 47 104
Processing & Others -363 -514
Total 203 202
* Source : NACF
 NET PROFIT OVER TOTAL ASSET (%)

1999 2001
MC 1.08 1.43
(Including Extension Exp.) (0.81) (1.01)
(Including Non-fin. Bus.) (0.27) (0.42)
Nationwide Bank -1.42 0.79
Regional Bank 0.11 0.41
* Source : KIF
IV. STRATEGIES FOR COMPETITIVENESS
 ENVIRONMENT : 1960s-1970s

Agricultural & Rural Economy

Population of Farmers : Over 60% of Total Population
Low Agricultural Production
Low Income
Usury Lenders

<Important Policy Measures>

High Grain Price Policy
Saemaul Movement
Agricultural Financial Institution : NACF & ACs
ENVIRONMENT : 1960s-1970s

Financial Policy and Markets

Low Savings
Low Institutional Deposits
Underdeveloped Financial System

<Important Policy Measure>

Specialized Banks Established to Support
Development of Specific Sectors
* NACF –Bank
Non-Bank Financial Institutions Introduced to
Mobilize Private Money Market Funds
* AC-MC
 Strategies(Success Factors) :
1960s-1970s

1. Multipurpose-Type Cooperative System

2. NACF as a Mentor for Building ACs
3. Complementary Dual Financial System
4. ACs as Agents of Saemaul Movement
5. Supplying Agricultural Policy Loans through
ACs
6. Favorable Monetary and Tax Policy
7. Savings Campaign
(1) Multipurpose Coop System

Background
Small-scale Farming & Homogeneity of Farmers
Failure of Close Coordination between the
Agricultural Bank and Agricultural Coops

Merits
Providing Farmers with One Stop & Package
Services
Synergy Effects : Low Costs, Efficient Process
Unprofitable Business and Activities Sustained
(2) NACF as a Mentor for Building ACs

Background

Rural Economy : Poor and Deficit Sector

Lack of Manpower and Management skill

Merits
Transferring the Management Know-How
Securing the Safety of MC Business
Enhancing the Bank Image
 (3) Complementary Dual
Financial System

Background
Different Supporting Laws
Different Business Areas

Merits
Transferring Funds from Urban Area to Rural Area
Exploiting Favorable Financial Policies for MC
Sharing Computer System
Expanding Business Geographically
(4) ACs as Agents of Saemaul Mo
vement
Background
Saemaul Undong’s Spirit war Similar to Coop Spirit
Saemaul Undong Required lots of Input Materials a
nd Funds

Channeling Inputs Contributed Business Growth of

Merits
ACs
AC Became a Center for Rural Development Econo
mically and Spiritually
(5) Supplying Agricultural Policy L
oans through ACs

Background
NACF : Commercial Bank + Agricultural
Finance Bank

Merits
Increasing MC Market Power in Rural Society
by Supplying Low Interest Rate Funds
Helping MC to Mobilize Deposits
 (6) Favorable Monetary and Tax
Policy
Background
Corporate Tax Rate : 28%
Deposit Interest Tax : 16.5%

Merits
Favorable Tax Rate for AC
- Corporate Tax : 12%
- Deposit Interest Tax : Exempt for Deposits of
20 Million Won or Less

Increasing Profits and Deposits

 Environment : 1980s-1990s

Agricultural & Rural Economy

Self–Sufficiency of Rice Achieved
Still Low Farm Household Income
WTO

<Important Measures>
Restructuring Agriculture
Increasing Long-term Investment Loans
Educating Advanced Agricultural Skills
Environment : 1980s-1990s
Financial Policy and Markets
Inefficient Financial Institutions
Financial Liberalization Trends
Globalization in Financial Markets

<Important Measures>
Deregulation and Restructuring
New Financial Institutions Allowed to Enter
the Markets
High Competition
Towards Universal Banking
 Strategies(Success Factors) :
1980s-1990s

(1) Nation-Wide Computer Network

(2) Starting Credit Card Business

(3) Favorable Deposit Instruments and Services

(4) NACF’s Support for Managerial Safety of ACs

(5) Advertisement and Public Relation

(1) Nation-wide Computer Network

Background
 NACF : Equipped with Computer On-line System
 AC : Without their Own Computer System
The Same System could be Applied to Acs
with Low Costs

Merits

 Nation-wide Computer Network Built up by 1989

 Front Line Work Revolutionized
 Each AC-MC Became a Part of A Nation-wide
Bank Connecting with NACF & AC Branches
(2) Starting Credit Card Business

Background
 NACF : Entered Credit Card Business in the middle
of ’80s
 AC : Had Computer Network Completed
The Foundation established for Introducing
Card to AC

Merits
 In 1993, Coop Card was Developed to be Used for
the Transaction between Farmers & AC
 Later on, Expanded to the Credit Card
 Card Business as well as Computer Network
Increased Competitiveness considerably
V. COMPLEMENTARY SCHEMES
FOR SOUNDNESS & SAFETY

SUPERVISION
 Guidance and Auditing
 Prudential Regulation

COOPERTIVE SELF-HELP SCHEMES

 Mutual Assistance Fund
 Deposit Insurance Scheme

GOV’T ASSISTANCE
 Alleviation of Farmers’ Debt Problem
 Other Favorable Policies
 SUPERVISION

Authorities Target About

Board of Gov’t-related Busin

NACF AC
Audit & Inspection ess
MOFE & Financial Financial
NACF AC
Supervisory Service Business
Ministry of Agriculture
NACF AC Comprehensive
and Fisheries

NACF AC Comprehensive
 MOFE & Financial
Board of Audit Ministry of
Supervisory
& Inspection Ag. & Fisheries
Service

Delegating Authorities

NACF
Cooperatives
Auditor
Audit Committee

NACF’s Assets AC’s Assets &

& Bus. Execution Bus. Execution
 MUTUAL ASSISTANCE FUND

PURPOSE
 Providing New-Interest Rate Loans
 To Support Balanced Growth of Cooperatives

SOURCE
 AC : 2/100 of Operating Income
 NACF : Similar Amount to Contributions of ACs

USES
 To Support Merging among Acs
 To Support Vitalizing Some Business
 To support Healing ACs Suffering from Big Losses
MC DEPOSIT INSURANCE SCHEME
• PURPOSE
Safeguarding Depositors
Maintaining Safety of Coop Financial System
• PREMIUM RATE
1/1000 of Deposit Outstanding
• MAXIMUM OF INSURANCE PAYMENT
50 Million Won Including Principal and Interest

NACF AC

Korea Deposit MC Deposit

Insurance Corporation Insurance Fund
 GOV’T ASSISTANCE
 Measures to Alleviate Debt Burden of Farmers
Lowering Policy Loan Interest Rate
Expanding Loan Guarantee Fund Contributions
Contribution 1998 2000

Gov’t 368.6 (57.8%) 900.7 (99.5%)

Fin. Inst. 46.9 (7.4%) 82.0 (9.1%)
Inv. Income 221.9 (34.8%) -77.9 (-8.6%)
Total 637.4 (100.0%) 904.8 (100%)
With This Guarantee Fund, Swapping Farmer’s
Overdue Loans for Low Interest Rate New Loans
→ Reducing Bad Loans of Acs
 VI. CONCLUSIONS

Competitive Cooperative Financial Institutions

Vehicles for effective Agricultural Finance

National Level Organization in a Coop. Financial System

A Mentor Leading Small-scale Coop Banks

Competitiveness Depends on Strategies

Strategies adapting to Environments

Gov’t Role in Agricultural Finance

The Ultimate Problem Settler keeping Markets Healthy
 Positive Cycle of Financial
Business

NACF AC Farmers

Financial Financial Financial

Bus. Bus.
Management

Other Bus. Other Bus. Investment,

Consumption
 New Challenge and Tasks

Challenge and Opportunity

 Market & Credit Risk has Increased
 Global Competition being Deepened
 Financial Industry being restructured Towards
 Universal Banking System

 Strategic Tasks
 To Upgrade Risk Management System
 NACF : From Bank to Diversified Financial Service
 AC : From MC to Regional Bank
 Promoting International Alliance among Coop Banks
Thanks Very Much