TWENTY CREDIT unions around the State face "serious solvency issues" and there is likely to be serious problems within the sector, according to the Central Bank's financial institutions supervisor.

Jonathan McMahon, assistant director general for financial institutions supervision, told the Oireachtas Committee on Economic Regulatory Affairs the regulator was at an early stage of assessing problems at credit unions, and would start stress-testing loans.

“We cannot sit here and say that there are no problems in the sector,” he told the committee.

The regulator said there were 20 credit unions which had high levels of arrears, and they were being monitored closely due to concerns about the impact of the high arrears on their solvency levels.

The regulator did not have the resources to determine the full scale of problems across the State’s 414 credit unions, he said.

“We have got 28 people currently looking at 414 credit unions – we don’t have the resources to get down into the detail of some potential problem areas,” he said.

James O’Brien, the registrar of Credit Unions, told the committee that some credit unions “may not be viable on a stand-alone basis”, but that he did not have legal powers to transfer struggling credit unions into stronger ones.

The only option currently available was to liquidate a non-viable credit union, he said.

Merging credit unions was “an emotional issue”, but emotion “needs to be set aside” for financial stability and the health of the sector.

Mr O’Brien hopes to increase the number of staff monitoring credit unions to 40 in a year’s time.

Financial stress was increasing “quite dramatically” at credit unions, he warned, and there had been a “sharp rise” in loan arrears. About 13.5 per cent – or around one in every eight credit union loans – had not been repaid for 10 weeks or longer, compared with 6 per cent two years ago.

He was concerned about the significant increase in the number of loans that credit unions have rescheduled to give struggling borrowers more time to repay.

A review of credit union loan books found that 85 to 90 per cent had not provided sufficiently on provisions for bad loans, he said.

A proposal under Section 35 in the new Central Bank Bill would force credit unions to set aside more funds to cover possible losses on rescheduled loans – up to 20 per cent of a loan’s value.

“Directors in credit unions must face up to the challenges and ensure that appropriate provisions for bad and doubtful debts are made that truly reflect the quality of their loan books,” he said.

Mr O’Brien defended the measure, describing it as “sensible and prudent” in the face of opposition from credit unions.

He said he was “surprised” at the reaction of the Irish League of Credit Unions, a representative body covering 404 credit unions in the Republic which had initially supported the Central Bank Bill.

Section 35 was “not overly draconian”, he said, but was a “proportionate” response to ensure credit unions emerge through “a critical period” over the next 18 months. Mr O’Brien said he expected many problems, including loan arrears, to crystallise at credit unions by the end of their financial year in September.

He raised concerns that credit unions had provided significant loans to a small group of people, and that there was a concentration of lending in certain sectors.

The registrar has restricted lending, but it “didn’t do it lightly”.