BORROWERS could face higher interest rates as credit unions are forced to pool spare cash to cope with future losses.
A report found 27 credit unions had set aside too little cash to cope with shocks while almost €1bn worth of loans haven't been paid for 10 weeks or more.
A government-appointed commission yesterday demanded tough new professional standards be applied across the sector. It wants credit unions to pay into an emergency bailout or "stabilisation" fund being set up to cope with any future losses.
The commission is headed by Prof Donal McKillop of Queens University.
In an interim report published yesterday, it called on credit unions to pay around €140m -- or 1pc of all deposits -- into the rescue fund, which will be controlled by the Central Bank.
The new fund is one of a range of measures aimed at preventing a banking-style crisis in the smaller credit union sector.
The commission says every credit union should have an internal audit function. It wants a new fitness and probity regime introduced that will vet those sitting on the board of each credit union.
The recommendations are likely to be accepted by the Government and put in place by the Central Bank.
Credit unions should also appoint or train risk managers and compliance managers.
The new measures would impose such a burden on the weaker credit unions that it would leave them with no choice but to join with stronger credit unions, experts said.
The number of credit unions could fall by half, from 407 to 200, as the sector goes through a wave of forced mergers.
Towns and villages will not lose their credit union office. Instead, the community lenders should end up with a main office in larger towns with branches in smaller towns and villages.
There are fears that the higher costs associated with the new regime will force some credit unions to charge more for car loans and education loans, which are often cheaper than loans from banks.
However, over time, cost savings following mergers could help bring down loan costs.
Prof McKillop said one in eight credit unions was failing to set aside the minimum 10pc of deposit cash they were required to hold in reserve.
He said 27 institutions had less than 7.5pc of their deposit book in reserve.
The report said these institutions had so little cash set aside that they were particularly at risk if there was any new shock to the economy.
A beefing up of the bailout fund is necessary to counter rising member loan arrears.
Almost €1bn worth of loans at credit unions in the State has not been paid for 10 weeks or more.
This represents gross arrears of around 18pc of the €5.2bn loan book.
Prof McKillop said the equivalent of around 1pc of the €14bn on deposit with credit unions should be paid into the stabilisation fund.
Prof McKillop's commission also recommended that Central Bank sanctions -- which can allow for fines and the jailing of bankers -- should also apply to credit unions.
Any credit union that fails to co-operate with the stabilisation fund will be forced to merge with another union.