Consolidation would allow for better standards in credit union credit risk management and lending practices which have been a matter of some concern for some time:
The relaxation, in recent years, of the lending terms operated by credit unions has increased the risk profile of the loan portfolio of the movement. It is not so long ago that credit unions made loans on much stricter terms than is currently the case. Loans were limited to a low multiple of the existing savings and income of the member. Business lending, such as is sometimes seen today involving loans over six figures, was unknown. Loans for speculative property developments were equally unusual.The substantial inflow of liquidity to credit unions together with certain ill conceived strategies within the movement have increased the pressure for credit unions to move into the mainstream lending market, in competition with the banks. This has sometimes been done without due regard to the borrower’s ability to repay, in the absence of any credible credit check or without the taking of viable security. Credit unions should now critically re-examine their credit policies in the light of the changing external environment.
It may be the case that with margins in credit unions declining, that pressure may be felt by boards to maintain the dividend level of the credit union over and above that which would be fully justified by the underlying financial results of the year in question. Such pressure may result in a temptation to artificially increase the credit union’s surplus, by a variety of means. The understatement of the provision for bad and doubtful debts is a feature of this tendency which we have commonly detected in our inspections. Various unacceptable devices to achieve this have been uncovered by our inspection teams. These include inappropriate rescheduling of overdue loans, the issuance of top-up loans in arrears situations or the exclusion from the provision calculation of overdue loans where security is held. Supervisors should be alert to such practices and it should always be borne in mind that the board has a statutory obligation to show a true and fair view of the financial affairs of the credit union and to account for the savings of their members. The interests of the credit union are not served by any fudging of hard issues facing it in respect of bad debts or any other issue. Address by Registrar of Credit Unions to National Supervisors Forum Annual General Meeting - 3 November 2007