Thursday 20 June 2019

Credit unions to give out more risky loans, as interest rates may double

  • Moneylenders’ customers a target in interest rate hike
  • Planned change will allow credit unions to double the interest they charge on loans
  • It will also let them offer a wider range of loan products
  • Some fears credit unions may take on riskier loans
(Stock photo)
(Stock photo)
Charlie Weston

Charlie Weston

Credit unions will be able to compete with high-charging moneylenders under proposed new rules.

A planned change in the law will allow them to double the interest they charge on loans.

Paschal Donohoe
Paschal Donohoe

Charging higher rates will enable credit unions to lend more money, because they can take on business that was previously too risky at the low interest rates.

It will also let them offer a wider range of loan products to the public. This should help credit unions who are struggling to grow their business.

There is no suggestion that existing loans would become more expensive. However, there are some fears credit unions may take on riskier loans.

Finance Minister Paschal Donohoe’s proposal may not be approved by the Government as ministers are concerned it would change the ethos of the credit unions.

The rule changes were recommended in a report by the Credit Union Advisory Committee (CUAC), which advises the Department of Finance on credit union matters.

The recommendations are based on the fact that credit unions are struggling to grow their loan books, and have to compete with moneylenders that are legally allowed to charge up to 287pc for loans.

Under the new rules, the maximum local lenders can charge would go from 1pc to 2pc a month.

That works out at a maximum of around 26pc each year.

Mr Donohoe will now ask officials to prepare legislation to bring the recommendations into effect.

Unlike banks and moneylenders, credit union lending rates are restricted under legislation.

The current cap on the interest that credit unions can charge works out at 12.7pc on an annual basis.

However, many charge far less than this on loans.

"I have asked my officials to begin preparations to make the legislative amendments required to raise the credit union interest rate cap from 1pc per month to 2pc per month, as recommended in the report and previously recommended by CUAC," Mr Donohoe said.

"This proposal will then be brought to Cabinet as part of the legislative process," he added.

It is understood that the proposals for a doubling in the interest credit unions can charge was discussed at last week's Cabinet meeting.

But ministers were concerned that the proposal would see the sector moving away from its traditional ethos of being member-owned, and being operated for the benefit of its members.

Credit unions are struggling to increase lending.

Just €4.5bn is lent out to members, despite the sector having assets of €17.2bn.

This means the loan to asset ratio is just 27pc, when it was traditionally 50pc.

Around half of credit unions offer the 'Personal Microcredit' scheme, which is designed to take on moneylenders and offer them much better value.

But it is a loss maker for the sector, which is why so few credit unions have taken it up.

It has a maximum interest of 12.7pc, providing loans of between €100 and €2,000.

Representative body, the Irish League of Credit Unions, welcomed the recommendation to raise the interest rate cap from 1pc to 2pc a month, particularly in the context of the Personal Microcredit scheme loans.

This will allow credit unions to compete more effectively with high-charging moneylenders, the league said.

Kevin Johnson, of the Credit Union Development Association, endorsed the recommendation that the level of regulation of a credit union should reflect its size, with tougher regulation for larger lenders.

The move will come under considerable scrutiny in the Dáil as TDs are highly protective of their local credit unions due to their community base.

Irish Independent

Also in Business