CREDIT unions are to be incentivised to merge as part of plans by regulators to restructure the sector.
Regulators feel that 407 separately owned and run credit unions is far too many.
The move to encourage mass mergers among the lending co-operatives could see their number fall to as few as 250 over the next three years, although no official figure has been put on the number of credit unions.
Credit unions are being hit hard by the downturn, with loan arrears among members totalling €1bn.
The final report of the Government-appointed credit union commission is set to recommend a string of tough new rules for the sector. The report is to be presented to Cabinet today.
It concludes that credit unions have a vital role to play in the future of financial services, and recommends that credit unions come together to form stronger units. A three- to five-year timeframe has been set for mergers.
The commission, which was headed up by Queen's University academic Prof Donal McKillop, proposes that regulatory rules could be temporarily relaxed while a merger is being bedded down.
It also recommend that credit unions shared services, that board members should have to pass fitness and probity tests, and it called for tougher governance rules.
Merged credit unions would be able to offer more services, like issuing debit cards and offering online accounts.
The current business model for the sector, of taking in savings and using them for loans, is under severe pressure. This is due to low demand for unsecured loans and low interest rates. Credit unions need to offer more and varied financial services if they are to prosper.
The Government has committed to pumping in €250m to prop up weaker credit unions this year, and the same amount next year.
A commitment to reform the sector was made to the IMF/ECB/EU.
The Central Bank and the Department of Finance have been working to restructure the credit unions for a number of months.
Tighter regulations on the amount of capital that has to be put aside to cover likely loan losses and lending restrictions mean that larger numbers of credit unions are struggling to meet Central Bank regulations.
Some 56 credit unions were found last year to have insufficient capital.
Laws passed last year mean that the Central Bank now has the power to swoop down on failing credit unions.
Regulators have the option of forcing the wind-up of a weak credit union, forcing it to merge with another, or getting the permission of the courts to have a special manager appointed.
Three months ago, the Central Bank sent a warning to the sector when it had a special manager appointed to Newbridge Credit Union.