Credit unions need long-term lending to ensure survival, committee finds

Credit unions need long-term lending to help them to raise their loan-to-asset ratio and to enhance their survival prospects, members of an Oireachtas committee have said.

At the launch of a report reviewing the credit union sector, Fianna Fáil finance spokesman Michael McGrath said long-term lending is an "essential ingredient" because at present, loans are being turned around too quickly.

“The problem for credit unions is that they can’t give out loans fast enough to keep up with the repayment of loans and, given the level of fixed costs they have...that has had a very real impact in terms of the investment returns,” Mr McGrath said.

The main restriction on long term lending for credit unions at present is that only 10 per cent of loans can exceed 10 years.

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The review, chaired by Fianna Fáil TD John McGuinness, was established to examine the health of the credit union sector after a report in June 2016 brought to light the significant fall in the value of loan books of Irish credit unions.

Unsustainable

The recommendation that long-term lending should be allowed in a wider range of circumstances comes in light of the movement’s low loan-to-asset ratio (a measure of total loans outstanding as a percentage of total assets) of 26 per cent, a ratio that the committee found to be “unsustainable”.

The committee suggested that it should be boosted to between 40 and 50 per cent, but noted that this could only happen if the credit unions were given the opportunity to lend over the longer term.

Asked by The Irish Times whether consolidation would be necessary to facilitate this longer-term lending, Pearse Doherty, Sinn Féin finance spokesman, said mergers should only be an option if this is the business model credit unions want to follow. "I am not supportive of a type of strategy that forces mergers on to the credit union," he said.

Fine Gael Senator Paddy Burke said that if larger credit unions wish to merge, "so be it". However, he said the committee couldn't lose sight of the fact that credit unions lend to the "small person who wants to buy a washing machine", and that they provide a "real good service to those people".

Challenges

Aside from expanding its loan offerings, other difficulties for credit unions identified by the review include: attracting a younger customer base, securing additional and diverse investment opportunities for asset holdings and formulating a strategic plan for the long-term sustainability of the sector.

One area identified as presenting growth opportunities was housing. Mr McGuinness said that credit unions should be “empowered to contribute to alleviating the housing crisis” and that current regulations are not “adequate to this imperative”. All of the committee members at the launch backed up this view, with Mr McGrath noting that there simply wasn’t “enough lending being done”.

The review comes against a backdrop whereby credit unions have increased their asset holdings by €2 billion to €16 billion between 2011 and 2016.

Additionally, the ability of credit unions to withstand stress is relatively strong with the average capital ratio standing at 16 per cent. Meanwhile, credit quality has improved, with average arrears in the sector down from 18 per cent in 2011 to 10 per cent in 2016.