Exclusive Gyeonggi Province Channels Annual Interest of 16.4 Billion Won to NH Nonghyup Bank

In raising local bonds, Gyeonggi Province has procured 460 billion won exclusively from NH Nonghyup Bank, its treasury depository, instead of through public offering, resulting in channeling approximately 16.4 billion won in annual interest to the agricultural cooperative bank.

According to documents submitted to Gyeonggi Province by Rep. Kim Han-seul (People Power Party, Proportional Representation) on the 19th, the province issued 460 billion won in local bonds on December 26 last year using a financial institution bond method.

The local bonds were issued by a single institution, NH Nonghyup Bank, the province's treasury bank. The maturity date is December 2035.

The applied interest rate is a floating rate that adds 0.67 percentage points to the three-month Negotiable Certificate of Deposit (CD) rate. At the time of issuance, the rate was 3.58% annually, which when applied to 460 billion won results in annual interest of 16.468 billion won.

However, as a floating rate, NH Nonghyup does not receive a fixed 16.4 billion won annually. With benchmark rates changing every three months, the province's actual interest burden and the bank's interest income also fluctuate.

In particular, these local bonds differ in their financing method compared to local bonds issued before and after by the province.

In February last year, the province issued 209.9 billion won in local bonds using a competitive public offering method with participation from 12 securities firms. Similarly, in March of that year, 273.1 billion won also had participation from 9 securities firms.

This year, the province raised 298.5 billion won from 13 securities firms in February and 197.8 billion won from 9 securities firms in May, respectively, using the competitive public offering method.

The province explained that it recruits local bond investors from securities firms through platforms such as E-Daily and Yonhap Infomax.

However, the 460 billion won issued in December last year did not go through such public offering procedures and was entirely procured from NH Nonghyup Bank, the treasury bank, using the financial institution bond method.

As a result, the treasury bank managing the province's funds simultaneously lent 460 billion won to the province and became a creditor receiving interest.

If the 3.58% annual rate at the time of issuance is simply applied, the interest paid to NH Nonghyup amounts to approximately 16.468 billion won per year. In particular, since the local bonds are linked to the three-month CD rate until maturity in December 2035, if benchmark rates rise in the future, both the interest burden for the province and the interest received by NH Nonghyup could increase together. Conversely, if rates fall, the interest amount will also decrease.

The province takes the position that competitive public offering was difficult due to the unique circumstances of the year-end issuance timing.

A provincial official stated, "Securities firms typically exhaust their annual investment funds and close around mid-December," and "At that time, the province's budget approval timing had not been finalized either."

Adding further, "It was also considered that approximately one week is required for actual fund procurement when conducting a competitive public offering," and "In a situation where it was difficult to predict the timing of budget passage, we had to complete the issuance of local bonds by year-end, so we chose to raise funds through financial institutions," the official explained.