Credit union movement undergoing a period of seismic change

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.

“These people know that if they don’t perform, they won’t get credit again,” he says. However, the Central Bank wants higher provisions on this lending because it perceives it to be riskier.

For its part, the Central Bank argues that the requirements “do not prevent credit unions from assisting members who are experiencing financial difficulties with their loans”. It emphasises that credit unions must be prudent in how they lend money.

“It is the money of the saver members that is ultimately lent to borrowing members. Ensuring that those borrowers can repay is paramount in protecting those savings”.

But credit unions argue that it’s taking them away from their core purpose.

Can the ethos survive?
Such restrictions are making credit unions more cautious about lending, which in some ways is no bad thing is no bad thing given the scale of arrears in the sector. However, it is also making it more difficult for credit unions to perform their core function and help their members.

“They’re making us cherrypick our members and who we lend to which is not what we’re about,” says one manager.

And another manger says: “We’re not lending as much as I would argue we should be.”

Indeed Kieron Brennan, chief executive of the Irish League of Credit Unions (Ilcu), says that credit unions have access to "literally billions of euro which could be lent".

Stronger credit unions can pick up the slack. A manager of a larger credit union assertsfor example, that if “it means making 100 per cent provision for a guy we’re doing that” in order to keep lending and helping that person who is in financial distress.

But others simply won’t be in a position to do so.

“If we have to provide for it [the loan], it means that we’re limited in what we can do for that customer in the future,” says a manager of a smaller credit union.

Pushing people into moneylender web
So what is happening these customers? The credit unions suggest that they are being pushed down the road to licensed moneylenders, where they can pay annual interest rates of almost 300 per cent on their loans – and to the even murkier world of illegal moneylending.

But how does this sit with the Ilcu’s remit of “keeping members out of the clutches of unscrupulous lenders where possible”.

“If society wants to encourage access to credit, tying our hands is not furthering that argument,” says one credit union manager.

According to the Central Bank’s own report on moneylending last week, 77 per cent of customers who have used moneylenders in the past 12 months claim to have been refused credit by a credit union or a bank/building society.

As a spokesman for MABS says, “in fixing one problem, another one has arisen” in relation to the tougher lending criteria for credit unions. The debt advisory agency has seen a slight increase in the number of people coming for help in relation to moneylending problems.

A future for smaller unions?
The other major issue facing the credit union is the restructuring of the sector. Established this year, the goal of the Credit Union Restructuring Board (ReBo) is to facilitate the voluntary restructuring of the credit union sector – in effect by encouraging larger healthier credit unions to swallow up smaller ones, or those in difficulties.

So far this year, the Central Bank says that there have been six voluntary transfers, while a number of others are “in progress”. This compares with four transfers in 2012 and four in 2011.

The remit of ReBo – “to underpin the stability and long-term viability of credit unions and the sector at large” – is very valid, but some would argue that “voluntary” restructuring is a bit of a misnomer. After all, the raft of regulations – fitness and probity, for example, will become a reality for credit unions with assets of less than €10 million next year – has made it “pretty impossible” for smaller credit unions to meet these requirements.

Such credit unions – which have had volunteers firmly at the steering wheel – are unsurprisingly saying that they don’t want the hassle of F&P; they don’t have the resources to pay for additional staff members; and the technological transformation as heralded by Sepa (Single European Payment Authority) next year is something they may not be able to cope with either.

“Unless you’re north of €100 million, you’re not at the races,” notes a manager of a larger credit union of the need to be of scale to survive.

One small rural credit union, with a loan book of €4 million, and which operates on a part-time basis, is a bit more upbeat about its prospects, asserting that its future will depend on loan demand, with a possible uplift from the home renovation scheme on the way. Nonetheless, he notes that “we are being subtly and gently nudged towards merger with a larger credit union. Life is being made more difficult”.

Already mergers are happening. The Health Services Union for example, which has 27,000 members, has already taken over the loan books of two smaller credit unions – a Texaco staff credit union which had about 400 members, and a community credit union on James Street, which had 2,500 members.

It’s also in negotiations with St Gabriels in Cork, which, once finalised, will bring its asset book up to the €200-€250 million mark.

Brennan says that it’s as yet unclear how ReBo will carry out its work – or how it will spend the €250 million fund to which it has access – but notes that there have been expressions of interest from about a quarter of Ireland’s 400 credit unions to restructure.

“The successful survival of a credit union may require greater co-operation to meet the needs of their members, or indeed it may make more sense for a particular credit union to merge with another credit union to develop the necessary scale to meet the needs of members,” says Johnson.

There are suggestions that practices in some credit unions are stuck in a “time warp” – one, for example, needs a week’s notice to withdraw more than €1,500 – and need a merger to modernise. For rural members, however, who are quite attached to their local credit union, the restructuring may mean the loss of their local outlet – in a similar way to the loss of post offices.

The future ...
Amid all the challenges, the future does also presents enormous opportunity for credit unions. The traditional banking sector has been eviscerated, leaving little competition and a huge gap which the credit unions could step in to fill. From next February, the first credit unions will be able to make payments into their accounts by electronic transfer under a deal announced last week.

For Brennan, this means credit unions will be able to offer a full range of personal financial services and thus will offer a “real alternative” to the traditional current account. It could also mean that credit unions will look to offer mortgages.

"There's no reason why they shouldn't do it," says Brennan.


Limites on lending
The view from abroad
It's not just Irish credit unions which argue that limits on lending are negatively impacting the sector. Executives at the World Credit Union Council also suggest that it's counter-productive.

“You need strong credit unions which are able to make loans – if you limit credit union sector activity, you give the field to unwelcome entities and this destroys the purchase power of the family and works against the growth of the economy,” says Grzegorz Bierecki, director at the council. “Any restriction in lending is clearly in the interest of money lenders. Credit unions’ biggest competitors are money lenders – but this is a form of predatory lending.”

Brian Branch, president and CEO of the council, notes that, globally, lending limits are “pretty uncommon”.

“We strongly support prudential regulation in order to protect the saving of the members and for risk management but we see the cost and difficulties in two areas. One, if you start limiting the ability of credit unions to serve their members and also if you start to impose high regulatory burden costs, it can make it more economically difficult to service people of lower and modest incomes.

“You can’t have a situation where you have the same regulations in credit unions and banks – you have to recognise the uniqueness of credit unions,” says Bierecki.

And while there might be momentum behind creating larger credit unions in Ireland, for Branch, smaller credit unions can remain economically viable, despite the burden of compliance and investment in IT.

“It doesn’t mean that every small one isn’t sustainable; you find small ones that have particular market niches,” he says.