Financial regulators have launched an investigation into agricultural land-backed loans for sole proprietors amid concerns these products are being used to circumvent household lending regulations.
Some lending companies and loan brokers have been promoting agricultural land loans as a way to bypass debt service ratio (DSR) regulations or secure loan-to-value (LTV) ratios of up to 80%.
Nationwide agricultural cooperatives apply a 50% DSR cap when farmland-backed loans are used for household purposes, including home purchases. However, this restriction does not apply to business-purpose loans. Regulators suspect borrowers may be disguising household loans as business loans to secure larger credit lines—a practice already seen in home mortgage lending.
Authorities plan to first verify whether sole proprietors who obtained agricultural land loans are actually engaged in farming.
"Generally, borrowers must submit farmer certification to obtain agricultural land loans, so nearly 100% of loans go to registered farmers," a financial regulatory official said on the 2nd. "However, whether these farmers are actually farming has not been properly monitored."
Regulators will also examine whether collateral valuations are being conducted properly. Many regional agricultural cooperatives and lending companies calculate loan limits through their own internal appraisals.
Loan delinquencies are another focus area. According to a December analysis by the Bank of Korea's Jeju branch, the non-performing loan ratio at Jeju-area agricultural and livestock cooperatives surged from 0.49% at the end of 2020 to 2.97% by the end of June last year.
Industry observers expect nationwide agricultural cooperatives to be primary inspection targets. These institutions held 71.03 trillion won in agricultural land loans at the end of last year—the largest among domestic financial institutions. NH NongHyup Bank also offers such loans with an outstanding balance of 11.88 trillion won, though regulators are said to be focusing more on secondary financial institutions.