Central Bank concerned about credit union lending practices

Weakness in how many credit unions write loans is a concern, the Central Bank has said, at a time when parts of the sector are trying to expand into mortgages and small-business lending.

The report comes at a time when credit unions are struggling with excess deposits and are continuing to place limits on how much money individuals can put on deposit. Lucan Credit Union wrote to customers recently to say it was halving the limit on its savings accounts to €10,000. Member share accounts are capped at €35,000.

The Lucan credit union move continues a trend across the sector in recent years, with savings account caps being set at as low as €15,000 as of late last year.

An increase in savings across households during the Covid-19 crisis and concerns that banks, which are also struggling with excess deposits, may soon start charging retail customers negative rates have seen more individuals seeking to put money in credit union accounts in recent months, according to industry sources.

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Credit unions are already being charged negative rates for excess funds that they place with banks.

“Since the Covid crisis started, savings coming into credit unions are running at over twice normal levels, as is the trend in the wider financial services sector,” said a spokesman for the Irish League of Credit Unions. “Some credit unions have started imposing a monthly savings cap as they feel that this gives them more control and helps stop once-off large lodgments.”

The Central Bank’s credit union supervisory commentary report for 2019, published on Tuesday, said it found almost 550 individual risk issues as it carried out assessments of credit unions last year. It looked into risks across areas including governance, credit, operational, business strategy, investment and capital.

“Weaknesses were evident in a number of credit unions in each of the risk categories, including governance and credit underwriting,” the Central Bank said. “This is concerning at a time when the sector faces many challenges and when many credit unions have signalled their intent to change business models to allow for increased home and SME lending.”

Falling numbers

The number of credit unions in the Republic had fallen to 241 by the end of last year from 406 in 2011, as the industry succumbed to a wave of mergers while grappling with a slump in lending and income pressures.

Loans across the sector amounted to 28 per cent of assets as of the end of September 2019, according to a Central Bank report, published in December. That is down from 49 per cent in 2007, and ranks among the lowest across credit union movements worldwide.

The optimal loan-to-assets ratio is widely viewed to be about 50 per cent.

Combined membership of the industry totals about 3.4 million, while total assets increased 31 per cent to €18.3 billion over the period 2011 to 2019. The regulator eased restrictions on long-term lending by credit unions in January.

"We acknowledge that some credit unions have made progress towards addressing prudential concerns," said Patrick Casey, the registrar for credit unions at the Central Bank. "However, it is a concern that we continue to identify weaknesses in core areas including credit underwriting. Clearly there is still more work to be done.

“At a time when so much attention centres on lending capacity, it is essential that credit unions address the fundamental weaknesses identified in these areas.”

Mr Casey added: “Lending regulation changes introduced in early 2020 provide additional lending capacity. To be sustainable, credit unions must demonstrate that they have the competence and capability to avail of this additional lending capacity.”