Credit unions warned of loan risk
This is according to the Financial Regulator’s Registrar of Credit Unions Brendan Logue, who said the issue of rescheduling of loans has come to the forefront in the economic crisis.
“Clearly, credit unions must deal with their members who are in arrears in a reasonable and supportive way,” he said.
When a member requests that a loan be rescheduled Mr Logue said he understands the member is given an entirely new loan agreement. His concern is that appropriate provisions should be created for bad and doubtful debts.
“I understand that when a new (rescheduled) loan is issued that the arrears which may previously have arisen on the original loan are normally deleted from the computer system.
“Rescheduling of loans without simultaneously creating appropriate provisions can pose a potentially serious and hidden danger to the financial stability of credit unions due to the suppression of provisions which should rightly be made otherwise,” he said.
Rescheduling of loans usually involves lengthening their maturity.
The Department of Finance is currently reviewing credit union legislation to extend the limits on the movement’s long-term loans which were capped at 10 and in some cases five years.
Minister for Finance Brian Lenihan said recently that a section of the Credit Union Act places a major restriction on credit unions allowing members to pay loans over a longer period and promised that this rule, Section 35, would be reviewed by his officials.
A spokeswoman for the Financial Regulator said it advised credit unions that it has no issue with rescheduling loans if appropriate.
“We recognise that there may be a need, in some instances, for rescheduling of loans but this should be accomplished by renegotiating the repayment instalment as is prudent, and the terms of the original loan should not be altered in the records of the credit union.
“This will provide transparency on the true level of loan arrears and produce the appropriate provisions for bad and doubtful debts needed to reflect the deterioration of the quality of the loan book.
“In the interest of maintaining adequate provisions it is important to have the correct level of loan arrears provided for,” she said.
An Irish League of Credit Unions source said that from the union’s point of view it is about giving members an opportunity to have a fresh start to match changed circumstances.
