A good many small community based credit unions have had a torrid time in recent years and probably right now aren’t seeing much of an improvement. The Co-Op Bank’s decision to cut the interest it pays on its community bank accounts – such s their Community Directplus, Co-Operatives Directplu and Social Enterprise Directplus accounts – will prove to be another, small and slow, but certain turn on the screw in the coffin of already beleagured credit unions.
Small community based credit unions are really struggling – at best, they have seen flat income levels, at worst they’ve seen their income fall away, especially from grants and interest receipts. Yet there is often little opportunity for them to reduce their overheads in line with the fall in income. Trying to increase income by growing the loan book can often carry a disproportionate risk of bad debts so for some they have a stark choice – grow or merge or die a death of a thousand cuts. The Co-Op decision will prove to be just another cut…
Let’s look at what the Co-Op is doing…
Interest rates paid on customer balances have never been lower, certainly not in my lifetime. Until June the Co-Op will be paying a tiered rate of interest – Nil% on balances up to £1,999; 0.12% on balances £2,000 to £9,999; 0.15% on balances £10,000 to £24,999; 0.18% on balances £25,000 to £99,999; 0.21% on balances £100,000 to £249,999; and 0.25% on balances over £250,000.
That’s to say the most the Co-Op will ever pay any credit union right now is one quarter of one per cent per annum… peanuts.
Yet those peanuts are being crushed!
The new rates from June 2015 will be: balances up to £24,999 Nothing, yes absolutely nothing – the Co-Op will get to keep your money for free!; £25,000 to £99,999 0.06% – a third of the already derisory amount it had paid previously; £100,000 to £249,000 0.09% – less than half it had previously paid; £250,000 to £499,000 0.18% – a cut of one third from the rate it had paid previously; over £500,000 0.25%, no change.
The message is clear… the Co-Op isn’t interested in supporting small organisations, it’s using you, the small credit union, to extract itself from its own financial difficulties … it doesn’t have the cohonas to abuse bigger organisations in the same way as they’re prepared to abuse you.
So it’s you, the smaller community based credit unions, and organisations just like you who will feel the brunt of this decision… it will be another straw on the camel’s back…
You see, right now, because you’re getting virtually nothing on the money you are sitting on and with additional grant income difficult to come by, the only way you can meet the regulator’s solvency targets might be by increasing the interest you receive on your loan book. As you’re limited by law as to the maximum interest rate you can charge on the loans you make, this means you need to grow your loan volumes – the number of loans you put out and the amount you loan out.
The issue is you need to do this without increasing your bad debts. Desperate people will go to any lengths – you will be lied to, some applications will be pure fabrication. How robust are your application procedures throughout your credit union? You might get credit reports on potential new lending, but how reliable are those reports? – they are not as accurate as you’d hope! And you probably can’t always rely on your longstanding members’ past savings history as an indication of their ability to repay any new loans – because people have so many ways nowadays of avoiding repaying their debts – not just the formal insolvency processes of bankruptcy, DRO, and IVA, and informal debt solutions such as DMP and DRO, but also pleading poverty in any debt collection process passing through the courts, and even disappearing.
It’s easy to see the situation whereby a credit union that’s already struggling with the the regulator could be forced into administration and then closure because of its bad debt experience and low level of bank interest income.