Will reforms save South Korea’s mutual savings banks?

Small-business and P2P lending offers fresh revenue streams.

South Korean regulators are overhauling mutual savings banks to expand lending beyond real estate and improve risk management, aiming to transform a sector long plagued by risky projects.

In February, the Financial Services Commission (FSC) said it would let the banks serve small businesses and operate online peer-to-peer (P2P) lending platforms.

The measures are meant to boost credit access for individual business owners and small merchants.

The FSC also plans to enforce capital buffer requirements, limiting dividend payouts when banks fall below mandated thresholds.

Regulators outlined the creation of an asset management company to help banks manage bad loans, a persistent source of instability.

Mutual savings banks have a troubled history. In 2011, illicit lending practices surfaced, and Mirae Savings Bank Chairman Kim Chan-kyung reportedly tried to flee to China by fishing boat, according to local media.

By 2016, the number of banks had fallen to 79 from 93, affecting roughly 100,000 customers, the Korea Development Institute said.

Problems began to resurface in 2019 when real-estate project financing and large debt guarantees from brokerage firms created additional exposure.

By 2024, mutual savings banks held $3b (KRW4.5t) in risky project loans, second only to mutual trust funds, according to Financial Supervisory Service (FSS) data.

The sector has returned to profitability, reporting $286m (KRW419.92b) as of September 2025, after losses in 2023 and 2024.

The FSC’s reforms aim to balance growth with stronger safeguards. Expanding lending to small businesses offers fresh revenue streams, whilst capital and bad loan rules target structural risks.

Yet integrating P2P lending raises operational and regulatory challenges. Banks must adopt technology, ensure transparency, and manage unfamiliar credit risk—tasks that will test both regulators and lenders.

Questions to ponder: