Brian Branch: What is the International Credit Union Movement Facing?2020-04-06
We have endeavored to stay in communication with credit unions around the world over the last month. Technology today allows us faster and more complete information exchange than during previous crises. We are looking at three waves: Coronavirus Health Crisis, Credit Union Institutional Stress and Global Recession.
First Wave: Coronavirus Health Crisis
With the coronavirus crisis, credit unions find that their members are increasingly sick and unable to work, laid off, financially fragile and therefore set back by health costs. Those affected are not able to generate income, not able to make loan payments and are limited in how long they can live on their savings. Members will be subject to loss of assets, including their savings, retirement investments, housing or vehicles.
At the wider level, credit union communities suffer overwhelmed health care systems. As countries go into lock down, schools are shut down, unemployment increases and small businesses shut down.
Credit Union Member Interface:
Credit unions face a time in which their services are critical to their members and yet personal contact can put their employees and their members at risk. This has reinforced the importance of digital service delivery. Remote service delivery via online banking, mobile channels and video tellers has dramatically increased. Many credit unions have closed their lobbies or branches and have focused on service via drive-up, service window tellers and digital channels.
Not all credit unions are able to shift services to digital channels. Many continue to provide face-to-face service while addressing social distancing: spacing out their lobby waiting areas to avoid crowding, putting up plexiglass teller windows, providing tellers with gloves and sanitizers, and frequently wiping down service counters.
Member Financial Impact Mitigation:
Most everywhere credit unions are assisting members with loan restructuring: deferred payments, reduced interest, fee waivers, interest-only loan payments and loan extensions. Credit unions have introduced programs to provide affected members with advances, no interest or low interest loans through the crisis period. They have also allowed withdrawal on certificates of deposit without penalty.
In many countries credit unions have stepped up assistance to members with debt consolidation and financial counseling to help them manage the impact on their personal and family financial condition. There has been a dramatic increase in cyber attacks, phishing and cyber fraud. Consequently, some credit unions and their associations have provided identity and data protection guidance. Credit unions have contributed to community health services and to organizations assisting affected persons.
Many governments have imposed lender relief programs which include debt forgiveness, moratoriums on loan payments, limits in loan payments to interest only, and restrictions on collections or repossession of collateral assets. Some governments have established limits on savings withdrawals.
We have provided advocacy support to the international standard-setting bodies and to our members for regulatory flexibility to:
- Allow flexibility on restructuring loans.
- Allow credit unions to make loans with special terms and reduced documentation to assist members.
- Reduce provision requirements for state mandate affected loans.
- Designate credit unions as essential businesses.
- Ease restrictions by correspondent bank services to credit unions.
- Allow for temporary provision of cash & payment services to non-members.
- Allow flexibility in allowing credit unions to adjust their hours of service.
- Allow credit unions to conduct board, management, membership meetings virtually.
The Second Wave: Credit Union Institutional Stress
In 2020, credit unions will experience decreased return/income on their loan portfolios as a result of increased delinquency and write-offs, loan restructuring and interest rate reductions, state mandated loan payment holidays and increased provision costs.
Most credit unions will experience decreased liquidity as loans default, savings withdrawals increase and banks limit credit union withdrawals. They will also experience losses in their investments.
The result, beginning in the second quarter 2020 and extending through the year-end, will be slower growth, lower income and reduced capital reserves.
We continue to support national associations and credit unions with tools and training for:
- Cash Flow Analysis.
- Cash Flow Management Tools and Training.
- Liquidity Management.
- Training & Management of Flexible and Restructured Loan Implementation.
- Loan Performance and Term Analysis and Projections.
- Loan Recovery Support.
- Capital Impact Analysis and Business Planning.
- Business (Financial) Plan Training, Implementation and Supervision.
The Third Wave: Global Recession
Beginning in 2020 and into 2021 we expect a global recession as a result of the disruption of production and supply chains, international commerce and business shutdowns. Members will continue to suffer from unemployment, the inability to generate income, inability to make payments and loss of assets. Communities will continue to experience unemployment, stress on health systems and failure of small businesses.
The depth and length of the recession will depend on how quickly countries and economies come out of the health crisis and how robust their health response and economic stimulus policies are. South Korea took quick action to contain, test and prevent spread of the virus. Many countries have closed borders and restricted business to essential services or confined populations to home, except for travel to the doctor, grocery markets or financial institutions. Some countries have been slower to respond and contain the virus. Larger industrialized countries have produced fiscal stimulus policy measures to help their economies recover. Some regions, such as Africa and Latin America, are at the beginning stages of the spread of the virus and will exit the crisis later than those now approaching the apex of the crisis.
Where health infrastructure is weaker, policy is less robust, and where populations are congested and with fewer resources, the health and economic impact will be more severe. Continued economic impact often leads to social and political unrest.
The impact on credit unions will continue to be lower income, impairment of asset quality and reduction of reserves. This will be a challenging time for credit unions. Many smaller and thinly capitalized credit unions, experiencing further losses and insolvency, will not survive. Consolidation will proceed more rapidly in the credit union sector across many countries.
Yet, as we have seen happen through so many previous crises, credit unions will continue to provide cash and loans to their members while other financial institutions pull back in their lending. Credit unions will work with their members to help restructure loans and find ways to help them get through the crisis and keep their assets. The result will be increased membership growth and increased savings as consumers return service with loyalty. With large inflows of liquidity, lower return on bank deposits and limited lending opportunities, credit unions will then be under pressure to find good lending opportunities to lend that money out and earn the return needed to rebuild their reserves. Credit unions will return to expanding working capital, as well as agricultural, small business and housing lending. With increased membership growth will come increased demand to meet consumer expectations for convenience through digital service delivery services.
Crisis periods are when we see credit unions shine for their members and in their communities. Thank you for the work that you are doing to support your communities and for supporting our ability to help our international colleagues do the same for theirs.
Stay safe and stay well,
President & Chief Executive Officer