Cooperatives at financial risk due to lack of debt infor, seminar hears

Speaking to an academic seminar held by cooperatives of the central bank, Chulalongkorn University and Thammasat University, BOT governor Veerathai Santiprabhob said that savings cooperatives started to gather more risks after management problems were discovered with several of them.
First of all, savings cooperatives helped borrowers through debt rollovers or refinancing which extended maturity or the amount of debt for lower-quality borrowers, he said. This could promote these borrowers to an endless circle of debt.
As well, debt classification and provision were more relaxed than would be allowed under international standards, he said.
The second problem was the apparent belief by some savings cooperatives that they have low credit or default risk as their borrowers were also their employees, whose salaries could be deducted for debt repayment first.
The truth however, is that savings cooperatives did not know their customers’ entire debt burden as they could have borrowed from several financial institutions. Most savings cooperatives were not members of the National Credit Bureau, he said, and so have access to limited information on customer debt levels. Insufficient information for lending analysis creates accumulative risks, which could trigger a financial crisis. The National Credit Bureau was established after a financial crisis in 1997, he noted.
The third problem was that several cooperatives had large investment portfolios and, given the long period of low interest rates, search-for-yield behaviour has spread to cooperatives due to pressure from members who demand higher returns.
The resulting investments could raise risks in price, interest or credit. Cooperatives need employees with knowledge in finance, risk management and accounting in order to solve problems in time.
The fourth problem was the funding structure for cooperatives, which was similar to that of finance firms before the 1997 financial crisis, Veerathai said.
Most funding came from short-term borrowings that get extended into long-term loans for their members, causing potential liquidity risks as a result of a maturity mismatch, he said.
If global or domestic financial situations change, there could be a deposit run or share redemption that could adversely affect the financial health of cooperatives, he said.
The fifth problem was laws and supervision which lagged behind the changes and growth experienced by cooperatives, he said. Most accounting audits aim to garner comments for financial statements rather than identifying risks that may arise.
Veerathai urged cooperatives to ensure their members understand the importance of savings, through ensuring a savings cooperative system that could be trusted.
Members’ confidence was important and strongly connected to cooperative savings, he said.
The combined assets of savings cooperatives and credit union cooperatives amount to 9.3 per cent of the financial institution system and four million members.
The combined assets of savings cooperatives come third following commercial banks and specialised financial institutions. Savings cooperatives account for 15.3 per cent of total household loans.