4
Additional activities and membership size
4.1
A credit union that is undertaking ‘additional activities’1 (see Table 1) or that has more than 15,000 members, and is therefore subject to the requirement in Rule 10.3(3) of the Credit Unions Part of the PRA Rulebook, is expected to monitor its relevant business by using the ratios in paragraph 4.3 below, calibrated with values that are specifically aligned to its individual business model. Credit unions should have measures that help them define their tolerance for triggers and ratios that underpin their resilience. The ratios in table 1 below are indicative; the PRA expects boards to assess what is most important and reflects the risks in their organisation. The PRA expects the values selected by the credit union to provide an accurate and reliable business tool, by which its board may routinely and accurately monitor the credit union’s performance against its strategic plan and its regulatory obligations. The PRA also expects the credit union to be able to provide details of its chosen ratios, and evidence of the rationale underlying them, on request.
Footnotes
- 1. ‘Additional activity’ means (1) an additional activity carried out or additional service provided by a credit union as described in Rule 3.3, Rule 3.5, Chapter 4, Rule 6.4, or Chapter 7 of the PRA Part of the PRA Rulebook, (2) entering into a conditional sale agreement, as the seller, with a member of the credit union pursuant to section 11E of the Credit Unions Act 1979; (3) entering into a hire purchase agreement, as the person from whom goods are bailed or (in Scotland) hired, with a member of the credit union pursuant to section 11E of the Credit Unions Act 1979; (4)providing credit cards; or (5) lending to corporate members.
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4.2
The PRA expects such a credit union to review performance against its target ratios at least monthly, and to satisfy itself that performance is consistent with maintaining a business that is viable over a 12-month period and sustainable over a 36-month period.
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4.3
By way of example only, the PRA considers that prudent practice suggests that the indicative ratio percentages for credit unions that undertake additional activities or have more than 15,000 members for all calculations save loans to assets are those outlined in Table 1.
Table 1: Indicative ratios for credit unions that undertake additional activities or have more than 15,000 members
| Ratio | Additional Investments | Additional lending | Mortgages | Transactional accounts | Indicative ratio |
| Credit union’s borrowings as percentage of total asset | Y | Y | Y | Y | ≤5% |
| Total shares as percentage of total assets | Y | Y | Y | Y | ≥70% and ≤90% |
| Total bad debt written off as percentage of total loans | Y | Y | Y | ≤10% | |
| Net assets as percentage of sum of total shares and juvenile deposits | Y | Y | Y | ≥105% | |
| Bad debt (more than three months in arrears) as percentage of total loans | Y | Y | Y | Y | ≤20% |
| Non-earning assets as percentage of total assets |
Y | Y | Y | Y | ≤10% |
| Net zero cost funds as percentage of non-earning assets |
Y | Y | Y | Y | ≥200% |
| Loan income over 12 months as percentage of total loans |
Y | Y | Y | ≥6% | |
| Net loans as percentage of total assets |
Y | Y | Deliberately left blank |
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4.4
Table 2 sets out the PRA’s definitions of the terms set out in Table 1 for the purposes of the ratio calculations.
Table 2: Definitions for ratio calculations
| Term | Definition |
| Total assets | The total assets of a credit union that appear on its balance sheet. |
| Borrowings | The total closing balances of all loans received by a credit union (excluding any subordinated loans), authorised overdrafts, and committed lines of credit. |
| Total shares | The total closing balances of all loans received by a credit union (excluding any subordinated loans), authorised overdrafts, and committed lines of credit. |
| Net loans | The total amount outstanding at the relevant date on all loans to members (irrespective of when such loans were made) less provision for bad and doubtful debt. |
| Net liquid assets | Assets which can be realised for cash at short notice, and within at most eight days, less any liabilities payable within 30 days. |
| Bad debt | Total amount of loans to members where the loan is more than three months in arrears. |
| Total loans | The total amount outstanding at the relevant date on all loans to members (irrespective of when such loans were made). This includes any loans written off during the period. |
| Net assets | Total assets less liabilities (excluding members’ shares and juvenile deposits). |
| Juvenile deposits |
The total amount due to juvenile depositors. |
| Non-earning asset |
The total amount of cash, current account balances (excluding any balances earning interest), pre-paid expenses, and fixed assets. |
| Net zero cost funds |
The total sum of a credit union’s capital and liabilities excluding any liabilities that are subject to interest payable by or charges to the credit union. In practical terms, this is likely to only constitute a credit union’s reserves. (In general, shares are excluded as most credit unions pay a dividend on shares if they make a profit and any interest-bearing shares or juvenile deposits should be excluded). |
| Loan income |
The total amount of interest received on loans made to members during the 12-month period preceding the relevant date. |
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4.5
Where a credit union is experiencing significant growth of members, the PRA expects the credit union to consider the risks associated with increased membership and, where appropriate, take steps to address those risks. This should include consideration of operational risks such as those in Chapter 10 (for example, whether systems are capable of managing additional capacity, whether the credit union has sufficient staff to cope with the increasing demand), and whether any changes need to be made to update their processes and procedures.
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