Cantillon: Credit union sector needs some consolidation

Smaller credit unions aren’t necessarily best placed to provide medium risk loans

The 26 per cent loan to asset ratio of credit unions was found to be “unsustainable” by an Oireachtas committee. Photograph: Colin Keegan/Collins Dublin

The 26 per cent loan to asset ratio of credit unions was found to be “unsustainable” by an Oireachtas committee. Photograph: Colin Keegan/Collins Dublin

 

It has been a particularly tough few years for the credit union movement with Charleville and Rush branches going into liquidation, unauthorised transactions in Fermoy and Galway and fraud at Gurranabraher in Cork. While these cases caused some reputational damage, credit unions are often lauded in the localities they serve.

As banks continue to pull rural branches, and cut staff from the branches they keep, short term money lending is becoming the preserve of those charging 184 per cent APR on short term loans, and credit unions. Cantillon is clear on which of those is the better option.

But short term lending to fund unexpected roof repairs and finally replace that failing washing machine is not enough to keep a financial institution going. There can be all the goodwill in the world towards credit unions, but if they’re to continue in existence, their average loan-to-asset ratio has to improve beyond the current level of 26 per cent.

That was the stand out message from an Oireachtas committee established to examine the health of the sector. It found that the loan-to-asset ratio, which should be nearer 50 per cent, was “unsustainable”.

As a result, it said that long term lending was necessary to help credit unions improve their investment outlook and secure a long term future.

But fair words butter no parsnips, and merely saying that credit unions should be able to lend over the longer term won’t make it so.

Indeed, before we even get to that point, there’s a lot of work to be done. Smaller credit unions aren’t necessarily best placed to provide medium risk loans and so it would seem only natural that there will have to be some consolidation.

That, undoubtedly, won’t go down well in some quarters. However, underwriting large loans is a tricky business and, while it may be regrettable to see a number of small branches merge, that appears to be the best option. Credit unions mightn’t favour the prospect of closing, but if they’re to exist into the future, some will have to swallow their pride.

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