Credit unions warned of bad debts

Just one or two large bad debts could severely affect the solvency of credit unions and expose members' savings to unacceptable risk, the Irish Financial Services Regulatory Authority's chief executive, Pat Neary, warned yesterday.

Speaking at the 2006 World Credit Union Conference held at the Burlington Hotel in Dublin, Mr Neary said a move by credit unions to offer larger and longer-term loans would require additional expertise and tighter controls to manage the higher risk to members' funds.

Mr Neary said that a number of credit unions could no longer be regarded as small organisations that were only required to balance the books.

The reputation of the entire credit union sector could be badly damaged by the behaviour of only one or two unions, he said.

For this reason, he said, credit unions that take on additional risks should expect increased regulation and supervision.

Over 170 credit unions in Ireland have individual savers with balances of more than €50,000.

"These large shareholdings, which have to be remunerated through dividend payments, put pressure on credit unions to deliver high returns to their members and may thus be adding to the pressure to take on unacceptable levels of risk," Mr Neary said.

Several credit unions are keen to enter the mortgage market, but at the moment, they can only distribute mortgages in conjunction with other financial institutions.

Under the current credit union legislation, only 20 per cent of a credit union's loans can be advanced for terms of longer than five years, and only 10 per cent of these loans can be advanced for longer than 10 years.

However, a review of lending limits will take place in September.