Credit unions are facing huge lending crisis
THE effective nationalisation of Newbridge Credit Union, which has been taken over by Permanent TSB at a cost to taxpayers of up to €70m, marks a further worsening of the crisis confronting the country's almost 400 credit unions.
Newbridge, which has more than 37,000 members, is one of the country's biggest credit unions. The Central Bank, which was concerned about its financial condition, seized control of it when it appointed a special manager in January last year.
Since then, the full extent of the financial mess at Newbridge has gradually emerged. While its total loan book increased from €130m at the end of 2007 to €140m at the end of 2010, loan repayments fell from €50.5m in 2007 to €27m in 2010 and €22m in 2011.
This collapse in loan repayments was caused by a large number of borrowers running into problems.
As a result, Newbridge auditors Grant Thornton recommended that the credit union set aside €24m to cover possible bad debts in its 2011 accounts.
However, the Central Bank insisted that the provision for bad debts be raised to €41m, almost 30pc of Newbridge's total loan book.
Unfortunately, the true figure for loan losses at Newbridge will probably turn out to be even higher if reports that the eventual cost to the exchequer could be somewhere between €50m and €70m prove correct.
This would indicate that loan losses at Newbridge will come in at between 35pc and 50pc of its total loan book – a truly catastrophic performance.
In August, Finance Minister Michael Noonan approved a Central Bank proposal to merge Newbridge with neighbouring Naas Credit Union, something that ran into fierce opposition from some Newbridge members.
This plan collapsed over the weekend when Naas announced it was not proceeding with the merger due to concerns about Newbridge's finances.
This left only state-owned Permanent TSB interested – with the help of a large handout from the taxpayer – in taking over Newbridge.
The Government has now, essentially, nationalised Newbridge. This is the first time something like this has happened to a troubled credit union.
Is Newbridge an isolated case, or is it a sign of more deep-seated problems within the credit union movement? Are there other Newbridges lurking in the wings, waiting to mug the unfortunate taxpayer?
Unfortunately, there are clear indications that, while the problems at Newbridge are particularly severe, other credit unions also got swept out of their depth during the Celtic Tiger euphoria.
It is no secret that the Central Bank has been monitoring the country's almost 400 credit unions closely. It has also slapped lending restrictionS on 58pc of them. Figures indicate up to 20pc of credit union loans are in arrears.
The Government has set aside €250m to cover the cost of bailing out financially-troubled credit unions. What this means is that, even if the worst fears for Newbridge are confirmed, the Central Bank is clearly anticipating serious problems at other credit unions.
If the problems of the credit unions prove to be as bad as some of us fear, will €250m be sufficient to deal with the problem?
About the only thing standing between the credit unions and complete disaster is the fact that their lending represents just over a third of their total assets of more than €12bn.
What if you are a credit union member who needs a loan? All of this is bad news. Total credit union lending now stands at only €4.25bn, down almost €2bn since 2008.
With fewer loans being offered, and bank loans also as scarce as hens teeth, it is virtually impossible for many people to access credit, leaving them at the mercy of unlicensed moneylenders.
We will all be paying the price of the credit unions' bad lending decisions for many years to come.