In recent months several credit unions have gone bust.
It’s no accident that so many unions are failing, you see there are major structural and operational difficulties in the sector generally and within many individual unions, which problems are unlikely to go away soon.
I believe that every union in the country is affected by at least some of the issues I’ll be raising in this article. If you are a director of a credit union and ignore these issues, you are really not doing your job properly. And given that you are in a very special position indeed, where you are responsible for holding money belonging to, and lending money to, some of the most vulnerable members of our society, there’s really no excuse for either not noticing these warning signs, or recognising but ignoring them.
Here’s my list.
You need to answer these questions truthfully, however uncomfortable they may make you feel:
Is your union making a real profit or is it relying for its continued existence on incoming member deposits?
This is the big one for me…
If your union is not making a profit – and I mean a real profit after all of its bad debts have been recognised in its accounts – then the union is little more than a Ponzi Scheme – A Ponzi Scheme is where new, incoming, money is used to ‘hide’ earlier losses and financial problems.
Here’s a link to an article explaining what a fraudulent Ponzi Scheme is. Sure, neither you nor the union may be acting fraudulently, but all Ponzi Schemes, even their legal equivalents, have to come to an end some day, with disastrous consequences and much pain for all.
How accurate is the union’s bad debt provision? Are you sure it’s accurate? Really?
Is the ‘business’ of the credit union viable looking into the long term?
What is likely to happen if incoming member deposits slow up?
Do you know what your union’s underlying financial position is? Do you real fully understand its underlying bad debt experience – whether or not it’s recognised in the accounts?
Your loan book is a major part of the union – a proper assessment of its value, how much is ‘good’ and what is or might be ‘bad’ is key to understanding how strong, or weak, your your union is.
When assessing how strong the loan book is it’s worth remembering that you’re often dealing with a part of society which:
- has little or no idea how to best manage their financial affairs – they’ll often borrow, even though they cannot really afford it, for things that are not essential such as holidays, Christmas, habitually rolling over loans from several lenders. Put another way, you don’t know whether they are willing or capable of managing their financial affairs properly with your interests in mind;
- has little to lose in terms of assets, career or the money they have in their pockets if they choose not to pay you – they’re unlikely to work as hard as people who have more to lose to pay you and avoid formal insolvency;
- have relatively weak roots in/ties to where they live – they may rent rather than own their home, so could move more frequently – this could mean they could avoid addressing their financial difficulties or simply ‘disappear’ if their finances get really tough;
- often relies heavily on benefits, which can be withdrawn or reduced with little or no notice. Your assessment of your member’s ability to repay the loan can quickly prove unachievable, either as a result of changes in the benefits regime or the member’s circumstances – you have no influence over either;
- will, in the event things get really tough spend what cash they do have on themselves, their families and their more expensive loans, rather than on the union – expect your member to be advised to spend what money they do have on paying off their more expensive debts first (particularly payday lenders), leaving the repayment of you, ‘cheap’, credit union loan last – this will impact on your cash flows and profits;
- now have more options than ever that help them avoid paying their debts – the courts will be lenient with them if you pursue repayment though the courts; they can enter into bankruptcy for about £500 or even a Debt Relief Order for just £90 and; they’re easily persuaded into a Debt Management Plan as a ‘solution’ to their debt problems.
The point is you are lending money out at much lower rates than ‘your competitors’ to that part of society to whom lending is really quite risky.
And as you doing so at interest rates of less than 20% pa. This means that if less than one in, say, eight of the loans you make don’t pay – either because they can’t or won’t – then you have a major problem which will effect the viability of your union.
Do you receive monthly reports measuring just how many members’ loans are in default, what the value of such loans are, to what degree they’re in default, and setting out the reasons why? If not, you’re not in control, and there’s a good chance that you’re in trouble. If you do receive such detailed reports, what patterns do you see in them, and have you amended your lending and recovery procedures accordingly to deal with those patterns?
Here are some more specific questions you should be asking yourself:
Is your relationship with the local authority, housing association (say where you provide rent deposits), other groups, organisations or even specific families a healthy one for the union? Or are they merely taking advantage of your goodwill and social focus to shift what could be their own or others’ financial exposure on to you or to get ‘free money’?
Do you know how many borrowers never repay you anything of their loan or fall into arrears after just a few, say 3, months? What’s the common factor? If you have more than a handful of these, your lending practices are simply not sustainable, you’re giving members’ money away, and that’s not fulfilling your obligations as a director to protect the union’s assets.
To best protect the union’s medium to long term future, should you really be lending to people who (i) habitually roll over loans and demonstrate no real commitment to best manage or take control of their money; (ii) borrow for non-essential spending such as Christmas, holidays, etc; (iii) have not themselves personally demonstrated discipline by investing a certain figure in the union for a minimum number of months beforehand?
Do you have, and always apply, a robust system for new lending, or does it break down all too often?
Do you work hard to reduce both the number and financial impact of bad debts, such as asking for guarantees or security where you should be? How often, and how, do you chase debts that are overdue? Are you doing enough or are you making it too easy for people to avoid paying? Is your social conscience and desire not to be hard on debtor members putting the union at risk?
Do you do enough to help actual and potential members improve their financial education / position both on an individual and group basis? If you’re doing little or nothing, are you really fulfilling the social improvement element of your reason for being?
Is what, how and to whom you lend more reflective of the level of integrity and goodwill you would hope your borrowers will demonstrate than the systems the union has and procedures you follow? Is whether you get repaid more down to luck than your own good judgement?
You’re obviously driven to help the more vulnerable members of our society, that’s why you’ve agreed to occupy the position you’re in. It’s important that you recognise that there’s a real problem nowadays getting the balance right between your efforts to help society and your responsibility as a director to the union. Getting the balance wrong can have disastrous consequences, and in these highly uncertain financial times, it’s essential you keep testing where that balance lies because it will keep moving. Keeping testing and challenging where that balance lies can lead to some pretty uncomfortable discussions at board level, especially where individual board members are influenced by the interests of outside organisations.
If you’d like some advice from me, whether it’s a question of helping you come to some pretty difficult decisions at board level or putting in place a plan where the union is in an advanced state of decline, then why not call or e-mail me right now?
Licensed insolvency practitioner