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Massive cull of credit unions could shut down 300 offices

THIS weekend's annual conference of the Irish League of Credit Unions (ILCU) takes place as the community-based banking movement faces unprecedented change after decades of near-inertia.

Less than a quarter of the more than 400 credit unions currently in existence will still be around in 10 years' time, experts have predicted.

The sector faces a radical shake-up with a recent report recommending widespread mergers as the only way for it to survive a financial meltdown.

In the wake of this wave of amalgamation, around 100 unions will survive in the long term, predicted Justin Callaghan, executive director of FTI Treasury, which has been providing advisory services to the movement for eight years.

He based the figure on the fact that there are only 109 credit unions with assets over €40m, which is "probably the smallest assets size to lend itself to a feasible restructuring plan".

A senior credit union insider we spoke to agreed with this assessment. "I would say 100 max will exist independently in 10 years," he reckoned.

Another source with deep knowledge of the sector, who also did not wish to be named, foresaw an even more radical culling.

"Depending on government policy either none or 25 will still exist," he said. "If credit unions are not considered a component of a post-crisis banking system, none will survive. If they are to survive, the system has to rationalise into bigger operations that must also integrate, similar to European networks," he said. "Hence the figure of 25. And maybe even fewer would do. Perhaps 10."

However, weaker credit unions that are amalgamated won't necessarily shut down. They could still remain open as the local branch of a larger operation.

Consolidation of credit unions was the key recommendation in the recent report on the Commission on Credit Unions, which is being discussed at this weekend's ILCU gathering in Killarney.

The report shows that unions have weathered the financial storms relatively well -- compared to the carnage in the banking sector.

Average liquidity in December 2011 stood at 47.38 per cent while the loan-to-asset ratio in the sector was 40.76 per cent for the year as a whole.

However, it warned, in the absence of "corrective action" (ie, amalgamations), the "financial position of a significant number of credit unions will deteriorate markedly between now and 2013, due mainly to rising bad debts, poor governance and inadequate buffers of reserves".

The report does see a future for restructured credit unions, particularly in social lending.

Justin Callaghan agrees: "I believe there is a future. To what extent there will be local or centralised balance sheet remains to be seen," he said. "But the ethos is very strong. They have an important role for the local community. People are very comfortable with the credit union ethos."

This loyalty translates into a "stickiness in shares", which has spared the unions from an even greater outflow of funds in the face of falling dividends and worries about solvency.

Another fan of credit unions is Eddie Hobbs, who often steers financially troubled borrowers towards credit unions on his mobile clinics for RTE's The Consumer Show.

"I always check the financial situation of the local credit union in question. If I'm happy with that, I'd certainly send people to them," he said.

"Where credit is available, for example, in a recent clinic we did in Nenagh, the local credit union did a student loan at 6.25 per cent. That's very good."

When asked about the falling level of dividends paid on savings to a current average level of around 1 per cent, he pointed out: "You throw money into a credit union in order to be able to borrow money, not for the level of return."

Eddie also likes credit unions because of their "humane" approach to lending.

"They are good with people. You can hear that as soon as you talk to them on the phone. That's because they have hundreds of thousands of real human interactions every day, which is very different to how banks operate."

Sunday Indo Business