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Banks under pressure over tougher loan measures triggered by LH scandal

Headquarters of the Korea Land and Housing Corp. in Jinju, South Gyeongsang Province (Yonhap)
Headquarters of the Korea Land and Housing Corp. in Jinju, South Gyeongsang Province (Yonhap)

The intensifying scandal involving employees of the state housing developer Korea Land and Housing Corp. is likely to put banks under renewed pressure, as the nation’s financial authorities are mulling strengthening control over non-mortgage lending activities in all banking sectors.

The scandal centers on LH officials who allegedly took out huge land-secured loans for speculative property purchases, sparking public criticism over the integrity of the state-run institution that contradicts the central government’s drive to curb housing prices by imposing heavier tax burdens and regulations. 

The LH officials reportedly borrowed 4.3 billion won ($3.79 million) from the North Siheung NongHyup -- a financial cooperative in Siheung, Gyeonggi Province, supervised by the National Agricultural Cooperative Federation -- to buy land plot in two cities -- Gwangmyeong and Siheung, both in Gyeonggi Province, for speculative purposes, before the government last month announced a major development plan there.

Under pressure building over the LH scandal, the market watchdog Financial Supervisory Service recently began investigating whether there have been any problems with the cooperative’s lending process. 

“Not only agricultural cooperatives like the North Siheung NongHyup, but also first-tier banks, savings banks as well as credit companies will be subject to the ongoing inspection regarding non-mortgage lending services,” an FSS official said.

The move came after Finance Minister and Deputy Prime Minister Hong Nam-ki urged the financial authorities to launch an investigation into the controversial regional bank’s loan process Friday, saying “the latest land speculation was possible due to large-scale loans issued by a specific bank branch.”

The FSS will conduct its field investigation on some local financial institutions, where applications for non-mortgage loans rushed in right before some LH employees purchased land in the Gwangmyeong and Siheung areas, officials said.

Also, the authority has decided to dispatch some of its investigators to the government’s interagency task force aimed at examining the illicit land speculation, they added. 

The NACF, the parent company of NongHyup Financial Group, however, has announced that the process of lending screening at the North Siheung NongHyup was legitimate, following its own investigation over the LH employees‘ lending process.

In the meantime, the policymaking Financial Services Commission is set to unveil its plan to tighten non-mortgage loans in the secondary banking sector late this month, as the LH scandal aroused criticism that speculative buyers have increasingly rushed to mutual financial cooperatives since they are not subject to the FSC’s loan rules according to the current law.

“A series of government-led loan measures so far have mainly targeted major commercial banks. The upcoming comprehensive scheme to manage households will include measures to tighten loans banked by land and assets other than houses,” FSC chief Eun Sung-soo told reporters Thursday. 

Meanwhile, local banks, already faced with strict government instructions, including maintaining dividend payouts below 20 percent and prolonged loan maturity extension program, are now under growing pressure, an industry source said.

By Choi Jae-hee (