Regulators fear 'chaos' if credit unions rush to merge
Published 22/02/2012 | 05:00
Weaker branches seek to join with financially robust lenders
CREDIT unions have been warned by regulators to avoid a "merger mania" where large numbers of weak lenders agree tie-ups with stronger ones.
Chaotic mergers could be catastrophic for the sector, Central Bank-based regulator James O'Brien said.
Credit unions are pushing forward with plans to merge ahead of pressure from regulators to force a consolidation across the movement.
But Mr O'Brien said yesterday that badly planned amalgamations would be damaging.
"The prospect of unplanned 'merger mania' where credit unions 'jockey for position' within the sector is also a concern for us.
"Ill-thought out voluntary mergers happening in a chaotic fashion with little professional oversight of the restructuring process could have a catastrophic impact on the sector where the outcome simply creates bigger 'weak' entities incapable of developing," he said.
There are 407 credit unions in the State, but experts expect this number to fall to as few as 150 over the next two years.
Almost all credit unions are individually run and managed, with separate boards.
Rising arrears, loan losses and drop in income due to low demand for new loans is putting a massive squeeze on credit unions.
The Government has put aside €250m this year and the same again next year to be pumped into struggling credit unions that need to merge.
There was a need for "weak and failed entities" to be quickly dealt with, Mr O'Brien told a conference organised by the Credit Union Managers' Association in Athlone yesterday.
This newspaper revealed recently that the Central Bank has set up a special unit to manage mergers of credit unions.
The pressure on the sector was brought into sharp focus last month when the Central Bank took over the running of Newbridge Credit Union, amid fears at least another dozen will be swooped on by regulators.
The Government-appointed Credit Union Commission also found that loan arrears at the country's 408 credit unions have risen to €1bn, almost triple the level of arrears in 2006.
The commission found that 27 un-named credit unions were in serious need of capital.
The commission, headed up by Prof Donal McKillop, also found that 56 of the Republic's 407 credit unions were in breach of a requirement to keep 10pc of their asset base in reserve at the end of June this year.
Of the 56, some 27 had reserves of less than 7.5pc.
Pressure from members to lower the repayments on their loans is creating financial havoc for the community-based lenders, according to sources.
Every time repayments on a loan are rescheduled, the credit union has to put aside 20pc of the value of the original loan into its reserves.
This means that if someone is struggling to make repayments on a €10,000 loan and the repayments are stretched over a longer period, then the credit union has to set aside €2,000 into a loan provisioning account.