Business Opinion: The internal Irish League of Credit Unions (ILCU) report into the financial health of the credit union movement that made its way into the public domain last week paints what is on the face of it a very disturbing picture

Something in the region of four out of five credit unions are in breach of the ILCU's target for delinquent loans and perhaps more worryingly, nonchalance about the problem seems to be widespread amongst the affected credit unions.

It is inevitable that some of these unions will go bust, according to the report, and while the members may be alright, thanks to the league's reserve fund, the consequences will be very damaging for an organisation that is something of a lighthouse in the Irish financial services industry.

The €95 million reserve fund itself will also come under considerable strain and the Financial Regulator will impose tougher regulation. This in turn will affect the league's ability to lend to those who most need its help.

The report makes for grim reading, but Liam O'Dwyer, the league chief executive who took to the airwaves last week, seems surprisingly chipper. He choose to focus on the bad debt figure for the ILCU, which amounts to 0.46 per cent of assets, or some €35 million out of a loan book of €7.2 billion.

It seems like pretty small beer, but the best way to get a handle on it is to compare it to the commercial banks, and Eamonn Hughes, an analyst with Goodbody Stockbrokers, conveniently did just this last week.

He estimates that the non-performing loans at the two main banks, AIB and Bank of Ireland, averaged 0.17 per cent of assets. This is a pretty low figure and reflects the general health of the economy. It is also some way under the figure given by O'Dwyer for the credit unions.

However, before you start heading down to the credit union to withdraw your money, you should note that Hughes thinks the banks could let their bad debts rise to 0.47 per cent of assets before there would start to be problems.

The credit unions would appear to have a much more significant bad debt problem than the banks, but that should not come as any surprise. The very reason for credit unions coming into existence was to provide banking services to those declined by the commercial banks.

Thus, the argument goes, credit unions have always operated with a high level of delinquency and much of the strain caused by this is absorbed by the not-for-profit nature of the business.

It is a fair point, but the league is not out of the woods yet. If the ILCU as whole has a bad debt figure of 0.47 per cent, it is axiomatic that a number of member unions have bad debt figures well in excess of this figure and potentially of a level that means that they are going bust.

The decision of the ILCU to play down the whole issue seems a little irresponsible when set against such a background. But again it is not all that surprising.

The ILCU's strategy would appear to be one of trading itself out of the problem. By lending more money to better quality - in credit terms - customers it will eventually drive down the bad debt number.

This is harder said than done, with many banks now clearly targeting the credit unions' natural constituency and in some case appearing to offer better deals.

The ILCU wants to compete by taking the banks on in some areas that have been off-limits to date, namely longer-term loans and, in particular, mortgages.

Doing this will require regulatory approval, which to date has been withheld.

You would not have to be a tactical genius to realise that the ILCU can kiss goodbye to any hope of such approval if it was to let the impression take hold that it has a widespread solvency issue that it is not facing up to.

Hence the stance adopted by O'Dwyer last week and the wheeling out of what in spin-doctoring circles is called a killer fact: nobody in any credit union affiliated with the ILCU in its long history has ever lost their money.

It is early days, but it looks as though the ILCU will be able to keep the lid on things and pursue its chosen strategy.

But its officers will have no place to hide should a big credit union go to the wall and all that entails comes to pass.