First the good news. Total arrears at credit unions have decreased and there has been a slight increase in new lending volumes but, apart from that, the picture painted by the Registrar of Credit Unions, Anne McKiernan, at the CUMA Spring conference this week, was one of grim foreboding.

As background, Ms McKiernan set out the latest sectoral statistics that “starkly illustrate the financial challenges which the sector faces.”

Since September 2013, loans to credit union members have decreased by almost 10%, to €4bn. The sector average loan-to-asset ratio has continued to decline and is now at 30%. Over 200 credit unions are below this ratio, some “significantly so”. Total interest income has fallen by almost one half since 2009. Average sector arrears at end-September 2014 were around 17%, but almost 10 per cent of credit unions had arrears exceeding 30% of their loan book. The average dividend for 2014 is continuing to weaken and is below 1%.  Critically, little over half of all credit unions remain subject to some form of lending restrictions.

Ms McKiernan’s presentation marked a change in tack for the regulator insofar as the focus was less on more sanctions and more on questioning the entire business rationale for a sizeable number of credit unions. In short, it appears that for many credit unions, the ability – or indeed appetite – to survive as a sustainable business is open to question.
Until now, sanctions were perceived as providing sufficient motivation to modify behavior, but things have not worked out as planned, according to Ms McKiernan.

“It is clear that many credit unions have yet to adequately address weaknesses in credit policies and controls to meet regulatory standards. Given the level of our engagement and communication with credit unions on this core issue, and key documents setting out our expectations (such as the 2014 PRISM report and the Credit Union Handbook), we expect credit unions to have embedded significant improvements in relation to credit risk management.

“We have used lending and other restrictions as temporary measures to reduce risks until our concerns have been addressed.  Our expectation is that the sanction of a lending restriction would motivate credit unions to take all necessary steps to effect its speedy removal. Regrettably, this has not been our experience across the sector.”
Consequently, and to bring a “renewed focus” on this issue, the Central Bank has launched a review of lending restrictions. 

All affected credit unions have been contacted and challenged to set out a business case to be made to apply for a review of the lending restriction. The Central Bank is looking for internal audit validations and other documentation “to certify that prudentially sound practices are fully embedded in the credit union.”

In the cases of those credit unions who do not intend to apply for removal of their lending restriction they must set out the reasons why and declare the current state of their remediation work and likely timeline for completion. “This ‘comply or explain’ approach is to ensure that all credit unions with lending restrictions are actively working on getting their credit risk management framework to the right prudential standard, consistent with their obligations to protect members’ funds and lend responsibly.  Credit unions who do not address this issue in a substantive fashion must expect that we will use our powers to reduce the risk to members’ funds.”

Given the persistently low levels of loan-to-asset ratios and the mounting levels of compliance is difficult to avoid the conclusion that many of these credit unions may find they lack the will to live in this demanding environment.

Central Bank pressure, however, is being ramped up at all levels and even the ambitions of more forward-looking credit unions are under scrutiny.
Specifically, the Regulator mentioned the plans of some credit unions to offer full service payment accounts and electronic transactions through both payment cards and mobile phone and spoke at length on the challenges posed by such initiatives.  “It is important to consider very carefully the business case for any such business activity and assess your credit union’s resource capability to develop the operational model, infrastructure and expertise to deliver such services, while recovering the costs involved and mitigating risks,” she said.

Clearly, as the Regulator raises the bar significantly, the entire basis for existence of a substantial proportion of credit unions is being called into question. The tenor and content of the Regulator’s comments makes that clear, as she criticised the lack of strategic planning in the sector:
“A clear challenge is the reluctance of some boards and management to proactively address viability issues and develop new sustainable business models to deal with the current challenges.  In this respect, we remain concerned about the quality of strategic thinking and planning in many credit unions.  This is demonstrated in many strategic plans that contain generic or high level aspirations rather than a clear road map for the credit union’s future. Having no clear vision or strategy is not an option when you consider the scale of challenges which your sector is facing.”

These challenges are likely to be compounded by the expected spike in personal insolvencies that will likely leave credit unions at the bottom of the creditors’ listing when it comes to payment. In these cases, miniscule dividends can be expected but, perhaps more importantly, the new legislation has serious implications for lending practices at credit unions that habitually lend to individuals under the Reasonable Living Expenses guidelines set in the personal insolvency legislation.