COVID Risk Management for Credit Unions

Stay at home orders have resulted in a disruption of local and international economies. Loss of assets, income, and unemployment in turn prevent people from being able to pay their loans. Decreased liquidity, increasing provision costs, and a decrease in loan portfolio income are just some of the negative impacts of the health crisis on credit unions. The resulting institutional stress has led to reduced capital reserves of credit unions. 

Credit unions around the world are now talking about cash flow management, liquidity management, and spending considerable time restructuring loan implementation. Some other measures credit unions are taking include managing and analyzing non performing loans, dealing with regulatory constraints, and gradually moving towards collections at some point in the future.  The best course of action for credit unions is to focus on asset recovery, building their reserves, and mitigating risks as far as possible. 

Risk Considerations for Credit Unions During Covid-19 

Here are 7 common types of risks credit unions should consider managing during Covid-19:

Legal risk 

Credit unions may face potential legal consequences if employees working from home are not compliant with any of their policies, or they end up carrying non-compliant activities. 

Credit risk 

Owing to reduced income and increasing layoff during the pandemic, this is one of the major risks credit unions face. 

Liquidity risk

An increasing demand in loans causes a shortage of funds and liquidity for credit unions. 

Interest rates

Low interest rates put a pressure on interest rate margins, and consequently reduce earnings for credit unions. 

Reputation risk

An inability to communicate properly with employees and members result in negative comments on social media, leading to a damaged reputation. 

Strategic risk

A huge economic impact on industries such as travel and tourism, increasing healthcare expenses, and spikes in loans all lead to failure to meet strategic targets and plans.

Organizational risk 

Work from home orders and closure of schools leads to a decline in the workforce. It may also lead to frauds, decreased productivity, and an inability of vendors to provide services. All of this disrupts the functioning of a credit union. 

Mitigating the Impact of Covid 19 on Credit Unions 

Each credit union’s strategy to manage risks will differ as per the restrictions laid down by their government and their state. 

Managing the health crisis

If a state allows workplaces to be open, then credit unions must take all measures to keep their members safe. This includes keeping their reading areas of their lobbies free of crowds, and implementing social distancing measures in earnest. They must also digitize any processes that do not require in-person meetings. 

Ensuring security of members 

The next priority of credit unions should be protecting the interests of their members. 

To provide monetary assistance to members, they should help members with restructuring loans, providing loans at low interest rates, helping  members with deferred payments, and providing loan extensions. They must also communicate with their governmental institutions and get recognized as an essential service provider. They should also offer financial counseling to their members to help them get through this challenging phase. 

Cash flow management 

It’s imperative for credit unions to manage their liquidity during this period. Even though they must expect slow growth during the pandemic, they should use cash flow management tools to proactively make projections for the future and manage the flow of cash. 

As credit unions make concessions and become more flexible in their loan services for members, they also have to identify its impact on portfolio performance and proactively plan their loan recovery strategy. 

Education and support

Governments across the globe are taking aggressive fiscal stimulus measures to reduce the impact of the recession. Credit unions must serve as educational institutions, helping their members and the public at large take advantage of these measures. They should also help members rebuild their savings. As the public starts to see a credit union as an ardent supporter of its members and their welfare, they will be more confident to bring their savings to credit unions. They will also likely be more loyal to credit unions. 

Risk Management Checklist for Credit Unions During Coronavirus 

It is quintessential for credit unions to keep a constant tab on the developments taking place in their state, with regards to Covid 19. This includes keeping an eye on stay at home orders, new regulations to control the spread of the virus, and expected developments in various industries. This is a critical component of risk management for credit unions. 

Risk assessment helps credit unions identify and assess threats during Covid 19. 

Here’s a quick checklist to help credit unions identify and mitigate risk during the pandemic: 

1. Function according to the policies implemented by the government and ensure safety of its members. 
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2. Offer low interest loans to people and implement flexible loan recovery strategies as well to handle credit risk.
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3. Limit their exposure to long-term investments and loans, and balance the duration of all assets. This will help them to control interest rate risk. 
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4. Promote communication with their members and ensure the availability of help to members when needed. This will help them handle reputation risk. 
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5. Conduct regular meetings with teams and maintain ongoing communication. Analyze and evaluate policies and plans, to balance strategic risk. 
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6. Help their workforce adjust in a work-from-home environment.  Have necessary backup plans and policies in place to avoid transaction failure.

Conclusion

While Covid 19 has presented never-seen-before challenges for credit unions, by carefully assessing and considering all possible risks, it is possible for credit unions to sail through this difficult time with minimal damages. The first priority of credit unions should always be to safeguard their members’ interest. Without member support, credit unions cannot thrive. 

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