27 credit unions are ‘seriously undercapitalised’

THE country’s 408 credit unions hold over €12 billion in savings on behalf of 2.9 million members but the Commission on Credit Unions has found that a worrying 27 unions are “seriously undercapitalised” and total arrears are over €1bn.

It is not the case that much of the sector is on the edge of collapse — of the 408 credit unions, 30 have assets in excess of €100m and four have assets in excess of €200m.

However, there is a concern that more than half (216) have assets less than €20m and almost three-quarters (299) have assets less than €40m.

The income of credit unions peaked in 2007 at €860.4m. However, with the onset of the financial crisis, that had fallen to €772.42m by 2010. Much of that decline can be put down to a loss of income from interest payments. Between 2006 and 2009, that income increased from €572.88m to €613.52m but then dropped sharply to €546.47m the following year — putting it at the 2006 level.

Credit unions have also been lumbered with increasing costs caused primarily by bad debt and loan write-offs. Between 2006 and 2010, costs have almost doubled, from €321.51m to €626.77m. In 2008, the sector made provision for €38.28m for bad debts, but were forced to increase that by €157.49m in 2009 and €215.06m in 2010 in recognition of a continued decline in the quality of the loan book.

Credit unions are also encountering an increase in the percentage of their gross loan books in arrears over nine weeks. In 2006 the percentage was 6.3%, However, it was 9.85% in 2009, 15.15% in 2010 and 18.69% in 2011. According to the Commission there are currently 98 credit unions each having arrears over 25% of their gross loan books.

The precarious situation has meant customers are suffering. There has been a pronounced decrease in the average size of dividends paid to members since 2007. For the first two years of the period, average dividends to members were just over 2%. However, these fell to 1.94% in 2008, to 1.58% in 2009 and to 0.90% in 2010.

As of June 2011, of the 408 credit unions analysed, 352 (86%) hold at least 10% of assets as total realised reserves. However, there are, however, 56 credit unions (14%) with total realised reserves below 10% of assets, of which the Commission says 27 could be considered “significantly undercapitalised” as they have total realised reserves of less than 7.5% of assets.

“These 27 credit unions have total realised reserves of €12.17m against total assets of €609.28m (or 2%),” the Commission said. It believes that questions should be raised about the financial soundness of the 60 credit unions with total reserves of less than 10% of assets.