Is the Central Bank going OTT on the Credit Union reserving?

[Brendan Burgess]

I firmly believe that the Financial Regulator, and Brendan Logue in particular, did a great job in preventing the credit unions from going mad in the boom. The CU movement really resented having their lending practices called into question. If it had not been for the toughness of Brendan Logue in the face of still CU opposition, I think many CUs would have gone bust by now.

I fully support prudent provisioning and, in fact, it is better to overprovide than underprovide.

But I wonder if they are going too far and if it's damaging the interests of borrowers and the economy.

The Credit Unions generally are member oriented. If a borrower is in difficulty they want to facilitate them and they will reschedule the loan to a more manageable level.

But if they agree to a rescheduling, the CU must make an immediate provision of 20% against that loan. This is a huge disincentive to the CU to reschedule.

They have to make the following provisions against arrears:

0 -9 weeks|nil
10 - 19 weeks|10%
20 - 39 weeks|20%
40 + weeks|60%

So it is better for a credit union to refuse to reschedule the loan and allow them to go into arrears up to 19 weeks. They can let it run for up to 39 weeks, before they have to increase the reserves. Seems crazy.

By the way, all Credit Unions must provide 10% of all their assets anyway - so a rescheduled loan will have a provision of 30% against it.

Brendan

 

[DB74]

When you say provision do you mean Bad Debt Provision or do they actually have to hold 20% of the funds in cash reserve somewhere.

I presume you mean BDP but just checking.

 

[Slim]

By the way, all Credit Unions must provide 10% of all their assets anyway - so a rescheduled loan will have a provision of 30% against it.

Brendan

I take it you are refrerring to Statutory Reserve of 10%. That is the last ditch reserve in the event that a CU is wound up. It cannot be counted as Bad Debt provision and used to stop a CU from getting into difficulty. Slim