Credit unions told they must reform

CREDIT Unions will fail in the current financial crisis because of insufficient reserves, poor management and business decision-making which will require a significant restructuring of the sector, the registrar of credit unions James O’Brien has warned.

Speaking at the credit unions’ National Supervisors Forum Mr O’Brien said some credit unions are already experiencing significant difficulties in their day-to-day business.

“A failure of one or more credit unions could lead to a significant loss of confidence across the sector. This must be avoided.

“Part of our regulatory work will be concentrating on identifying weak, or non-viable, credit unions and taking pre-emptive action where necessary in order to sustain the financial strength and wellbeing of the sector,” he said.

Mr O’Brien said trends emanating from the sector suggest even greater reform may be required than those envisaged in the regulator’s recent consultation paper. He said they intend to bring forward proposals in this area early in the New Year.

“How the sector will cope in this new business environment is not yet clear but what is certain is that change is coming fast and only those credit unions that adapt quickly, identify the risks and take the difficult business decisions to ensure their long-term sustainability will manage in these new circumstances,” he said.

Mr O’Brien said the subject of restructuring within the credit union sector must be put firmly on the table.

“The current credit union operational model is coming under increasing stress.

“It must be recognised that not all credit unions will make it through this difficult financial and economic environment in their current structure.

“We expect that the economic downturn will continue to expose those credit unions that do not have the financial strength to weather the current difficulties – either because of insufficient reserves or because of poor management and business decision making,” he said.

Mr O’Brien said it is unclear as to the level of restructuring that is likely to take place over the next couple of years but he said we are now seeing an increasing number of credit unions coming under financial stress.

“The trend in arrears is continuing upwards and the opportunities for prudent lending are decreasing. Income is depressed and costs are either remaining static or increasing.

“Should these trends continue it is not implausible that a significant restructuring programme for the sector may be required,” he said.

Mr O’Brien advised credit unions not to wait for the market to determine their future.

“Directors and managers should now be looking closely at their own operations and drawing up projections and business plans to establish the financial capability of their credit unions to withstand further shocks on their business and taking the necessary preventative action,” he said.