The Washington-based International Monetary Fund (IMF) has told the Dickon Mitchell-led National Democratic Congress (NDC) administration in Grenada that the regulation and supervision of credit unions need to be strengthened.
In a report which has just been released, the IMF notes that credit unions have become an important player in the financial market on the island and that their “rising systemic importance calls for better oversight.”
Credit unions now account for one-fifth of deposits and one-third of loans to Grenadians.
There are reports that the sector has grown tremendously over the years and can now boast of 84,000 members and they benefit through increase access to consumer credit and mortgages.
The IMF made the following remarks on the Credit Union movement on the island.
Regulations
The Grenada Authority for the Regulation of Financial Institutions (GARFIN) should tighten lending standards and provisioning requirements and provide a tighter definition of capital (aligned with that for banks with capital requirements based on risk weights for broad categories of loan exposures).
Clearer regulatory guidelines, periodic stress testing, and better enforcement of corrective actions would help mitigate risks in the sector.
GARFIN has appropriately intensified the monitoring of NPL management, workout, and provisioning (e.g., through more frequent and targeted on-site examinations) and should continue such efforts.
Credit unions should be required to improve their internal risk management practices and debt collection efforts, recognising the difficulty of repossessing and liquidating collateral, the uncertainty in collateral valuation, and the lack of consistent information on borrowers’ credit history.
There is a need for credit unions to more quickly recognise loan losses and devise a strategy to reduce their legacy NPLs.
Supervision
An effective risk-based and forward-looking supervisory approach would boost confidence in the soundness of credit unions and allow risks to be detected and addressed at an early stage.
To achieve this will require (i) more granular information, (ii) better analytical capacity, and (iii) well-designed stress testing.
GARFIN should implement the risk-based supervisory templates (that have been updated recently with CARTAC support) and require an improvement in the governance and risk management of credit unions.
Data
GARFIN should consider publishing more details on prudential ratios, provisioning, and the composition of loans by sector and by type of credit.
GARFIN should strengthen crisis preparedness and incentivise greater resilience of financial institutions to climate-related shocks.
Enhanced collaboration with the ECCB is needed to accelerate the formulation of a national crisis management plan.
Grenada saw a rapid expansion of credit unions in the past decade. Their total assets grew by 13.4 percent annually during 2013–19, outpacing banks (at 4.9 percent annually).
During the pandemic, credit unions continued growing faster than banks, though the growth difference narrowed. The sector is highly concentrated in three largest credit unions (out of ten). They jointly accounted for 88 percent of total loans in 2022Q4.
Most borrowing was for houses, home furnishing, and land and vehicle purchase. Credit union NPLs rose significantly during the pandemic, before stabilising in recent quarters.
NPLs delinquent for more than 90 days rose from 4.5 percent in 2019Q4 to 9.7 percent in 2022Q3, before falling to 8.4 percent in 2022Q4.
These increases were driven by largest credit unions and occurred mainly after the expiration of loan moratorium programs at end-2021, while smaller credit unions had elevated NPLs even before the pandemic.
Credit unions in Grenada face other challenges, which can increase vulnerabilities during a downturn.
Profitability
Profitability had been through a secular decline, which was exacerbated by the pandemic. Beyond the saturated domestic loan markets, credit unions have limited business opportunities – investment in securities outside the ECCU needs permission from GARFIN on a case-by-case basis.
The mandate of credit unions limits their ability to charge fees from members to boost profitability.
Risk management
Utilising the regional partial credit guarantee scheme to help manage risks remains a challenge.
Moreover, credit unions do not have access to central bank operations or deposit insurance, making them vulnerable to liquidity shocks.