Mutual Finance Sector Faces 15 Trillion Won Deposit Outflow Amidst Tax Changes and Market Shift
South Korean mutual finance institutions, including Saemaul Geumgo and Credit Unions, saw deposit balances drop by more than 15.2 trillion won between the end of last year and April 2024. According to data from the Bank of Korea, the sector’s total deposits fell from 930.8 trillion won to 915.6 trillion won, driven by a combination of shifting investment trends, regulatory changes, and weakened consumer trust.
Why Deposits Are Leaving Mutual Finance
The exodus of capital is largely attributed to a “money move” where investors are shifting funds from traditional savings accounts into the stock market to capture gains from its recent strength. As of April 19, domestic stock market investor deposits grew by over 41 trillion won this year, reaching 129.3 trillion won. Industry analysts note that while mutual finance institutions initially attracted customers through special high-interest rate products, those depositors are increasingly choosing to move their funds into equities upon reaching maturity rather than renewing their accounts.
Regulatory and structural shifts have further accelerated this trend. Starting this year, tax exemption benefits for mutual finance members were tightened; individuals with an annual salary exceeding 70 million won are now subject to interest and dividend income taxes on their deposits. This change has diminished the competitive edge previously held by Saemaul Geumgo and Credit Unions compared to commercial banks, which saw their own deposit balances increase by 27 trillion won during the same period.
Saemaul Geumgo operates 3,198 branches across South Korea, with 70% of those locations situated outside the capital region, making the institution particularly vulnerable to the ongoing demographic decline in rural areas.
Operational Challenges and Future Outlook
Mutual finance institutions are currently facing a dual squeeze on both sides of their balance sheets. The Financial Services Commission has set a target of “zero” growth for household loans in the sector for this year, effectively limiting new lending to the volume of principal repaid by existing borrowers. Additionally, strict new regulations limit real estate project financing (PF) to 20% of total loans by April 2025, forcing these institutions to prioritize debt management over new business expansion.
Prospects for a quick recovery remain uncertain. With the sector recording a net loss of 379.7 billion won last year—its second consecutive year of deficits—dividends to members have declined by over 10%. As these institutions struggle to balance high-interest deposit offerings with the need to restore public confidence following past real estate PF instability, the sector faces an uphill battle to retain its customer base.
The current crisis for mutual finance represents a structural shift rather than a temporary liquidity issue. The combination of reduced tax advantages, regulatory caps on loan growth, and a shrinking regional population creates a cycle where lower profitability limits dividends, which in turn discourages further deposits. The ability of these institutions to pivot toward sustainable business models while managing legacy real estate risks will likely determine their long-term viability.
Frequently Asked Questions
How much did deposits decline in the mutual finance sector this year?
According to the Bank of Korea, total deposits in the mutual finance sector fell by 15.23 trillion won from the end of 2023 through April 2024.
Why are tax benefits for mutual finance deposits changing?
Government policy effective this year mandates that members with an annual salary over 70 million won must now pay taxes on interest and dividend income, whereas previously, a 30 million won exemption applied regardless of income.
What are the main restrictions on lending for these institutions?
The Financial Services Commission has restricted household loan growth to zero, and new regulations starting next April will cap real estate project financing at 20% of total loans.
Will the current trend of high-interest special deposits be enough to stem the outflow of capital from these local financial institutions?