Study: Farm Co-op Needs 7 Trillion Won

The results of a research study showed that over 7.6 trillion won is necessary to separate the National Agricultural Cooperative Federation’s financial branch composed of banks and insurance companies and its production branch that includes farming and livestock business.

If the National Agricultural Cooperative Federation, also known as Nonghyup, is to acquire the necessary funds on its own, it will take 15 years, so if the separation of the financial and production branches is to be conducted earlier, a significant amount of government financial aid will be required.

Nonghyup recently reported such research conclusions, which were conducted by Deloitte Anjin LLC, to the Ministry of Agriculture and Forestry (MAF).

Based on the findings, Nonghyup will hold meetings of board of directors and board of representatives on June 27 and 28, and will decide on its final plan of separation, which will be submitted to the government later this month.

According to the study, the separation of financial and production branches brings some repercussions such as no actual profits in the short-term as well as the constriction of the production sector that consists of agriculture and livestock business.

Hence, there are opinions suggesting the use of capital from the credit business sectors such as banks and mutual funds to support the production branch, and advising to then consider separation of both branches.

In particular, in order to push through with the separation, 7.6816 trillion won of its own capital is required. It will take 15 years for Nonghyup to gather up the necessary amount. There will be limits in acquiring funds through capital increases, and it would be more realistic for the government to provide assistance.

The reason why several trillion won is necessary is as follows: in order to meet the Bank of International Settlement (BIS) capital adequacy ratio of 10 percent, 3.3077 trillion won is needed, and it is estimated that an additional 4.3739 trillion won is required for the production branch to be independent.

Nonghyup’s separation of its financial and production branches has been an issue that has been left unsolved for over 10 years.

With research results out, MAF will hold public hearings when Nonghyup submits the final draft later this month, and if possible, create the government’s proposal within the year, and permit the separation to take place in the second half of next year.

It has been reported that MAF has not considered the total separation of Nonghyup’s financial sector to create a commercial or special purpose bank.

MAF’s position has been that in order to be faithful to the purpose of Nonghyup’s separation, which is to increase profits for its agricultural sector through the revitalization of its financial businesses, even after the separation, within the boundaries of Nonghyup Law, a mutual support system should exist between both sectors.

Nonghyup has been under fire for focusing on the more profitable financial sector than its production sector. As of the end of last year, the assets of the financial sector were worth 129 trillion won, while in contrast, the production branch’s assets were only worth five trillion won.

Sun-Woo Kim sublime@donga.com