Credit where it’s due

IN THE last five years, the banks, which cost taxpayers €64bn, continue to remain moribund. There has been no significant lending and their mortgage arrears problem continues to deteriorate.

In this environment, credit unions, while not shielded from the general economic difficulties, remain a coherent social and economic force.

Membership continues to increase, especially over the period of entrenchment in the economy. The increase in membership may also be a result of the disenchantment with the banks.

The crisis and the way in which the banks have been dealing with their customers have had a huge impact on the reputation of the banks. In addition, banks seem to have withdrawn from the market for personal loans, particularly such as those relating to holidays and Communions.

The financial situation of credit unions as a whole is stable. Outside the league’s membership, there is one credit union — Newbridge Credit Union — which has been the subject of much public debate and is known to be experiencing some financial difficulty. It is at present under the direction of a special manager appointed by the Central Bank.

While there is much speculation on the nature of the difficulties being experienced, there is no hard information to either draw conclusions about this credit union or inferences from this to others. In this context, it may be noted that the Credit Union Act, 2012 provided for the creation of Rebo — the Credit Union Restructuring Board — which was established last year with a view to oversee and facilitate the voluntary restructuring of credit unions.

However, this body has been slow in getting off the ground. While a chief executive has recently been appointed, it has yet to make any proposals. Given that Rebo is supposed to operate until the end of 2015, it is a concern that matters are not further advanced.

Like other financial institutions, credit unions also struggled with the consequences of the dramatic fall in economic activity. However, there are a number of indications suggesting that credit unions are now stabilising. Media reports of dramatic financial difficulties being experienced by credit unions are either exaggerated or misread the financial situation of the credit union movement.

Although there was a sharp fall in savings as the economic crisis developed in the early stages up to 2010, this trend has stabilised recently and our latest figures are indicating a slight increase in quarterly terms. While it may be too early to notice a change in trend, the recent increase in savings together with increased membership provides a basis for optimism.

This increase in savings may well reflect the increased confidence of credit union members.

At the end of the third quarter, league member credit unions in the Republic had assets of €12.4bn, essentially the same as at the end of 2011. However, assets did fall in 2012 and then recovered in 2013.

Investment losses have been minimal but the credit union sector is still affected by the liquidation of the Irish Bank Resolution Corporation. Despite the loss of some €15m by a number of credit unions by this liquidation, they weathered this storm.

A similar picture of improved confidence can be seen in the loans issued by credit unions. The loan book of credit unions suggests that the fall in loans — the bread and butter element of the credit unions — has slowed. Just over €360m in loans have been issued in year to June.

In the last few years, members focussed on paying down loans rather than taking out new loans. However, the slowdown in the rate of growth would suggest that people are becoming less uncertain about developments.

This is in keeping with the recent findings of our Tracker Series Disposable Income consumer survey which suggests that confidence is rising among consumers.

Coupled with the slowdown in loans issued, there is also a welcome stabilisation of loan arrears. Unlike the banks, where loan arrears continue to rise, loan arrears in credit unions have actually fallen.

Net arrears in Sept 2012 stood at €675m, down from €731m in 2011. This year loan arrears stand at 15.1% (€607m) but provisions stand at 17.9% (€722m) of loan book with reserves (capital) at 15% or €1.86bn.

This has been associated with a better handling of bad debts by credit unions. Credit unions have improved their management of arrears and underwriting of new loans. In Sept 2011, arrears stood at €120m, €82m in Sept 2012 and €41m in June 2013.

Besides the provision of doubtful and bad debts, credit unions as a whole are also relatively well capitalised. Both capital and liquidity ratios are greater than that specified by the regulator.

Credit unions have withstood a sharply deteriorating economic situation over the last five years. While, like other financial institutions, they were exposed to the fall in economic activity, credit unions are now operating from a firmer financial base.

There are now some signs of improvement in the economy: Employment is rising, the balance of payments is in surplus, government finances, while still difficult, are on the right track toward the target deficit in 2015 and even unemployment has recorded a fall, though marginal in the context of the number of people still unemployed.

If the economy improves as envisaged and confidence is sustained the impact on the financial situation of the credit unions will be positive and will provide a platform for a resumption of growth for credit unions.