Credit union movement undergoing a period of seismic change
Is the Central Bank’s drive to move credit unions into its regulatory net at odds with the ethos of the movement?
With Newbridge Credit Union dominating the headlines thanks to its swift transfer to Permanent TSB at the behest of the Central Bank, credit unions have moved once more into the spotlight. While the problems which lie behind the move may be particular to Newbridge, the broader sector is also going through a period of seismic change.
But is the Central Bank’s drive to move the credit union movement swiftly into its regulatory net at odds with the core ethos of credit unions? And will there be a place for smaller credit unions in the new model?
It’s a process that commenced in March 2012, when the Commission on Credit Unions made recommendations to strengthen the regulatory framework of the sector, and one that is now rapidly gaining pace.
Since October of this year, credit unions have had to comply with a raft of new regulations, including new lending limits; the application of the Central Bank’s fitness and probity regime; and the appointment of a compliance officer, risk manager and internal auditor. More changes are on the way, including the development of a training and standards policy by December and the mandatory reduction in the size of boards by March. Of most significance perhaps, is the restructuring, which will likely see more and more smaller credit unions swallowed up by their larger neighbours.
The Central Bank’s desire to impose regulatory rigour and oversight on the sector is understandable. With loans of €4.6 billion, Ireland’s credit unions have an arrears rate of some 20 per cent. Allied to this are problems facing individual institutions, such as Newbridge. It’s easy to see why Sharon Donnery, the regulator, said in September that players in the sector continue to face “significant challenges to their business model”.
A difficult trading environment
Credit unions have long held an important role in Irish society but, like all financial institutions, they have been hit by the recession. Demand for lending has dropped, leading to a drop in income.
One medium-sized credit union in the west, for example, used to lend about €1 million a month. Now it has dropped to €700,000. While demand may have softened, it’s also in part because lending criteria have tightened.
On top of this, several high profile bad investment decisions made by the sector means credit unions are now precluded from investing in riskier assets. Investment choices have effectively narrowed to either deposit accounts or capital guaranteed products – neither of which is performing strongly at present.
And writedowns might be coming through the Personal Insolvency Bill – although one manager of a larger credit union with €100 million in assets says it has yet to see such a case.
The new regulatory changes mean higher costs. Appointing an internal auditor – on a shared basis – will cost about €5,000, while a compliance officer will require the creation of a new role and an annual cost of about €20,000-€25,000 a year. On top of this, a credit union now has to appoint a risk manager.
Kevin Johnson, chief executive of the Credit Union Development Association (CUDA), which oversees 12 credit unions, recognises the importance of regulation in protecting members, but argues that it must also allow credit unions to “grow and thrive”.
But is this really happening? As one manager of a mid-sized credit union says: “It’s made a hard job harder. We’ve no difficulty with strong regulation and no one could argue it’s a bad thing as long as the Central Bank appreciates the amount of change hitting us very quickly and adopts a reasonable approach to it.”
Tougher lending criteria
Potentially of most concern to credit unions are elements of Section 35, which considers any amendments to a loan to be high risk lending. In such cases, a credit union has to make a 20 per cent provision against the loan – and if that person wants to borrow again in the future, the credit union will have to make a 100 per cent provision against the loan.
“If you break your leg and come to us and say ‘I can’t afford €100 a week, can I pay €60 a week till I get back to work?’ – now you’re an impaired borrower and we have to treat you differently,” notes one manager. “Now we have to provide or say no. It’s a very inhuman approach, a very blunt approach. We always used our discretion with it before – that’s what made credit unions different.”
Another issue of concern for credit union managers is “multiple top-up lending”, which applies to anyone in a credit union who borrows more than three times a year. For one credit union manager, such lending is its “bread and butter” adding that that part of the loan book outperforms its whole loan book.