Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident...

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Financial Soundness Indicators: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC

Transcript of Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident...

Page 1: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Financial Soundness Indicators:

Presentation to Credit Union Workshop St. Vincent and the Grenadines

By

Shelton NichollsResident Adviser on Financial Stability, CARTAC

Page 2: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

1. Credit Unions in the Caribbean Financial System (Stylized FACTS)

2. Framework for Developing Financial Soundness Indicators1. CAMELS and PEARLS Framework2. CAMELS/PEARLS COMPARISON

3. Financial Soundness Indicators:1. Core /Enhanced (Deposit-Takers)2. Pearls Ratios3. CAMELS/PEARLS COMPARISON

4. Reporting Regime for Credit Union Financial Indicators

5. Application of PEARLS to a Caribbean Credit Union

6. Database Development for Credit Unions: Often Neglected Area!

7. Imperatives for Enhanced Regulation of Credit Union Sector.

FORMAT OF PRESENTATION

Page 3: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Credit Unions in Caribbean Financial Structure

Page 4: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

1.0 Credit Unions in Caribbean Financial System

Domestic On-shore Financial Sector is quite large relative to the size of the regional economy.

◦ Total financial assets amount to around 131% of regional GDP (IMF estimate, WP/13/175)(p.7) Banking System Assets (95% of regional GDP) Non-Banking System Assets (36% of regional GDP)

Insurance Companies (20% of regional GDP) Security Firms (9% of regional GDP) Credit Unions (7% of regional GDP)

Page 5: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

1.1 Credit Unions in Caribbean Financial System

Share of Indigenous institutions in the Caribbean on-shore financial sector in decline.

Foreign Banks dominate landscape of Caribbean Financial Sector◦ 60% of regional banking assets held by Canadian-

based banks.

Page 6: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

1.2 Credit Unions in Caribbean Financial System

Credit Union Sector has grown in several Caribbean countries:

Financial Assets to GDP Dominica (39% of national GDP) Belize (21% of national GDP) Barbados (17% of national GDP) Grenada, St. Vincent and St. Lucia range between

13% and 19% of GDP of these respective countries.

Page 7: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Financial Institution

Commodity –Based

Producers

Service-Based

Producers

ECCU Area

Total Caribbean

Banks 14 67 40 81

Credit Unions

154 163 61 317

Insurance Companies

60 218 61 278

Offshore Banks

- 143 na 143

Total 200 614 200 818

1.3 Credit Unions in Caribbean Financial SystemNumber of Credit Unions

Page 8: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

2. Financial Soundness Framework :

CAMELS/PEARLSCredit Unions

Page 9: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

CAMELS FRAMEWORK ◦ Revolves around the following six groups of

indicators that focus on the health of financial institutions. Capital Adequacy Asset Quality Management Soundness Earnings and Profitability Liquidity Sensitivity to Market Risks

2.1 FINANCIAL SOUNDNESS FRAMEWORK: CAMEL

C

A

M

E

L

S

Page 10: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

CapitalAdequacy

• Determines how well financial institutions manage shocks to their balance sheets by focusing on capital position of institution to support loan portfolio growth and potential deterioration in assets.

Asset Quality• Judges overall quality of assets by looking

at exposure of assets in institutions portfolio to various risks.

M’gmt Soundness

• Judges overall soundness and effectiveness of management of the institutions by looking at governance, human resources, processes, controls and audit.

2.1a FINANCIAL SOUNDNESS FRAMEWORK: CAMEL

Page 11: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Earnings & Profitability

• Judges the Institution’s ability to generate to absorb losses by building an adequate capital base, finance expansion and pay dividends to its share holders.

Liquidity

• Judges ability of Institution to meet its present and anticipated cash flow needs including funding loan demand, share withdrawals and liabilities and expenses.

Sensitivity to Mkt Risks• Judges the sensitivity of loans and

deposits to sudden changes in interest and exchange rates.

2.1b FINANCIAL SOUNDNESS FRAMEWORK: CAMEL

Page 12: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

PEARLS FRAMEWORK

◦ Adopted by WOCCU in 1994;◦ Revolves around the following six groups of indicators

that focus on the health of financial institutions. Proposes a system of 44 financial ratios that deal with: Protection Effective Financial Structure Asset Quality Rates of Return Liquidity Signs of Growth

2.2 FINANCIAL SOUNDNESS FRAMEWORK: PEARLS

P E

A

R

L

S

Page 13: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Protection• Assesses extent to which credit unions can

provide a safe environment to protect their members’ money.

Effective Financial Structure

• Gauges financial structure of credit unions by assessing sources and uses of funds. Financial structure is effective when assets, financed by savings deposits, generate sufficient income to pay market rates on savings, cover operating costs and maintain capital adequacy.

Asset Quality• Assesses overall quality of assets and

identifies impact of non-earning assets on credit union income.

2.2a FINANCIAL SOUNDNESS FRAMEWORK: PEARLS

Page 14: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Rates of Return & Costs

• Monitors the return on all types of assets (uses of funds) as well as the costs of each liability. Looks at how yields and costs affect the growth of the credit union.

Liquidity

• Judges ability of Institution to meet its present and anticipated cash flow needs including funding loan demand, share withdrawals and liabilities and expenses

Signs of Growth

• Judges the growth of various areas in credit unions with a view to assessing member-client satisfaction as well as to help management maintain an effective financial structure.

2.2b FINANCIAL SOUNDNESS FRAMEWORK: PEARLS

Page 15: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

MAIN AREAS CAMELS PEARLS

REGULATORY/SUPERVISORY FRAMEWORK

SUPERVISORY TOOL

INDUSTRY BENCHMARKING TOOL

INFORMATION USED

MIX OF QUANTITATIVE

AND QUALITATIVE INFORMATION

LARGELY QUANTITATIVE INDICATORS

NATURE OF SUPERVISORY EXAMINATION

REQUIRES ON-SITE AND

OFF-SITE EXAMINATION

ON-SITE EXAMINATION NOT

REQUIRED

Comparing CAMELS AND PEARLSMain Differences

Page 16: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

3. Financial Soundness Indicators

CAMEL-BASED AND PEARLS-BASED

Page 17: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Conceptual Framework and Classification for Financial Soundness Indicators developed by IMF around 2001 with input from international bodies.

Financial Soundness Indicators Compilation Guide published in 2006.

New Compilation Guide with a focus on non-banks being prepared.

3.1Financial Soundness Indicators

Page 18: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Institutional Sector

•Financial Corporations

Deposit-takers •Commercial banks•Investment banks•Mortgage Banks•Development Banks•Savings and Loans Assoc.•Building Societies•Credit Union/Co-operatives•Micro-Finance Institutions

•Other Financial Corporations

Engaged in Financial Intermediation (but Non-Deposit Takers)

•Insurance Corporations•Pension Funds•Investment Funds•Securities Dealers

3.2 Classification for FSI Compilation: Financial Corporations

Page 19: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

3.2b Financial Soundness Indicators: Core Indicators for Deposit-Taking Institutions

CAMEL FRAMEWORK KEY INDICATORS

Capital Adequacy• Regulatory capital to risk -weighted assets• Regulatory tier 1 capital to risk -weighted

assets

Asset quality

• Non-performing loans to total gross loans• Non-performing loans net of provision to

capital• Sectoral distribution of loans to total loans

Earnings and Profitability

• Return on Assets• Return on Equity• Net interest margin to gross income• Non-interest expenses to gross income

Liquidity • Liquid assets to total assets• Liquid assets to short-term liabilities

Sensitivity to market risk • Net open position in foreign exchange to capital

Page 20: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

KEY INDICATORS

Deposit-Takers • Capital to assets• Large Exposures to capital• Geographical distributions of loans to

total loans• Gross asset position in financial

derivatives to capital• Gross liability position in financial

derivatives to capital• Trading income to total income• Personnel expenses to noninterest

expenses• Spread between reference lending and

deposit rates• Spread between highest and lowest

interbank rate• Customer deposits to total loans• Foreign currency-denominated loans to

total loans• Foreign currency-denominated liabilities

to total liabilities• Net open position in equities to capital

3.2c Financial Soundness Indicators: Encouraged Set

Page 21: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

KEY INDICATORS

Other Financial Corporations • Assets to total financial system assets• Assets to GDP

Nonfinancial Corporations • Total debt to equity• Return on equity• Earnings to interest and principal expenses• Corporate net foreign exchange exposure to

equity• Number of applications for protection from

creditors

Households • Household debt to GDP• Household debt service and principal

payments to income

Market Liquidity • Average bid-ask spread in the securities market

• Average daily turnover ratio in the securities market

Real Estate Markets • Real estate prices• Residential real estate loans to total loans• Commercial real estate loans to total loans

3.2d Financial Soundness Indicators: Encouraged Set

Page 22: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Although not mentioned in FSI Compilation Guide (2006), PEARLS has emerged as a prudential standard for credit unions operating worldwide.

◦ Provides standardised financial ratios for individual credit unions.

◦ While meeting specific needs of credit unions, complements existing financial soundness indicators based on other frameworks (CAMEL).

3.3 PEARLS Financial Soundness Ratios

Page 23: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

P - Protection Ratios Goals (Excellence)

P1. Loan Losses Allowances / Delinq. Loans >12 Mo. 100%

P2. Net Loan Loss Allowances / World Council Allowance Required for Delinq. 1-12 Mo. 35%

P3. Complete Loan Charge-off of Delinq. > 12 Mo. Yes

P4. Annual Loan Charge-offs / Average Loan Portfolio Minimized

P5. Accum. Charge-offs Recovered / Accum. Charge-offs > 75%

P6. Solvency (Net Value of Assets/Total Shares & Deposits) ≥ 111%

3.3a PEARLS: Protection

Page 24: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

P1. Loan Losses Allowances / Delinquent Loans >12 Months.

◦ Purpose: To measure the adequacy of the provisions for loan losses when compared to all delinquent loans over 12 months .

◦ Items Required: A-Allowance for Loan Loss (Balance Sheet); B- Percentage of Allowance Required to cover delinquent Loans > 12 months and C – Loan Balances of all delinquent loans > 12 months.

◦ Formula : (A)/(B*C).

3.3a.1 Key PEARLS Protection Ratios

Page 25: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

P6. Solvency Ratio.

◦ Purpose: To measure the degree of protection that credit union has for members’ deposits and share savings in the event of liquidation.

◦ Items Required: A- Total Assets; B- Allowance for Risk Assets; C –Balance of Delinquent Loans >12 mnths; D- Balance of Delinquent Loans <12 mnths; E – Total Liabilities; F – Problem Assets (losses to liquidate); G –Total Deposit Savings; H – Total Shares

Formula: – [(A+B)-(C+.035(D)+E+F-G]/(G+H)

3.3a.2 Key PEARLS Protection Ratios

Page 26: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

E - Effective Financial Structure Goals (Excellence)

E1. Net Loans / Total Assets 70-80%E2. Liquid Investments / Total Assets ≤ 16%

E3. Financial Investments / Total Assets ≤ 2%

E4. Non-financial Investments / Total Assets 0%

E5. Savings Deposits / Total Assets 70-80%E6. External Credit / Total Assets 0-5%

E7. Member Share Capital / Total Assets ≤ 20%

E8. Institutional Capital / Total Assets ≥ 10%

E9. Net Institutional Capital / Total Assets ≥ 10%

3.3b PEARLS :Effective Financial Structure

Page 27: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

E1. Net Loans / Total Assets

◦ Purpose: To measure the percentage of total assets that are invested in the loan portfolio, or to ascertain what percentage of assets the members have borrowed.

◦ Items Required: A – Total Gross Loan Portfolio Outstanding); B-

Total Loan Loss Allowances; C – Total Assets.

◦ Formula : (A - B)/(C).

3.3b.1 Key Effective Financial Structure Ratios

Page 28: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

E5. Saving Deposits/ Total Assets

◦ Purpose: To measure the percentage of total assets financed by savings deposits.

◦ Items Required: A – Total Saving Deposits; B – Total Assets.

◦ Formula : (A )/(B).

3.3b.2 Key Effective Financial Structure Ratios

Page 29: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

E9. Net Institutional Capital */ Total Assets

◦ Purpose: To measure the real level of institutional capital, after adjusting the allowances for risk assets to meet the standards of P1&P2, and covering any other potential losses.

◦ Items Required: Items Required: A- Total Assets; B- Allowance

for Risk Assets; C– Balance of Delinquent Loans >12 mnths; D- Balance of Delinquent Loans <12 mnths; E- Problem Assets (losses to liquidate); F – Total Assets;

◦ Formula : [(A+B ) – (C + 0.35(D) +E)]/(F).

*Institutional Capital comprise all legal and non-distributable reserves, non-withdrawable members’ share capital; capital donations and non-distributable reserves (from surplus).

3.3b.3 Key ‘Effective Financial Structure’ Ratios

Page 30: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

A - Asset Quality Goals (Excellence)

A1. Total Loan Delinquency / Gross Loan Portfolio ≤ 5%

A2. Non-earning Assets / Total Assets ≤ 5%

A3. Net Zero Cost Funds / Non-earning Assets ≥ 200%

3.3c PEARLS: Asset Quality

Page 31: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

A1. Total Loan Delinquency / Gross Loan Portfolio

◦ Purpose: To measure the total percentage of delinquency in the loan portfolio, using the criterion of outstanding delinquent loan balances instead of accumulated delinquent loan payments.

◦ Items Required: Items Required: A- Total Loan Delinquent

Balances; B – Total Gross Loan Portfolio;

◦ Formula : (A)/(B).

3.3c.1 Key PEARLS Asset Quality Ratios

Page 32: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

A2. Non-Earning Assets* / Total Assets

◦ Purpose: To measure the percentage of the total assets that are not producing income.

◦ Items Required: Items Required: A- Total Non-Earning Assets; B –

Total Assets;

◦ Formula : (A)/(B).

*Examples of Non-Earning assets include Cash on hand and floats, non -interest bearing current accounts, accounts receivable, fixed assets and prepaid expenses, assets in liquidation.

3.3c.2 Key PEARLS Asset Quality Ratios

Page 33: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

R - Rates of Return and Costs Goals (Excellence)

R1. Net Loan Income / Average Net Loan Portfolio Entrepreneurial Rate

R2. Liquid Inv. Income / Avg. Liquid Investments Market Rates

R3. Fin. Investment Income / Avg. Fin. Investments Market Rates

R4. Non-fin. Inv. Income / Avg. Non-fin. Investments ≥ R1

R5. Fin. Costs: Savings Deposits / Avg. Savings Deposits

Market Rates > Inflation

R6. Fin. Costs: External Credit / Avg. External Credit Market Rates

3.3d PEARLS : Returns and Costs

Page 34: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

R - Rates of Return and Costs Goals (Excellence)

R7. Fin. Costs: Member Shares / Avg. Member Shares Market Rates, > R5

R8. Gross Margin / Average Assets ˆE9=10%

R9. Operating Expenses / Average Assets ≤ 5%

R10. Provisions for Risk Assets / Average Assets ˆP1=100%, ˆP2=35%

R11. Other Income or Expense / Average Assets Minimized

R12. Net Income / Average Assets (ROA) ˆE9=10%

3.3d PEARLS :Returns and Costs (Cont’d)

Page 35: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

R9. Operating Expenses / Average Assets

◦ Purpose: To measure the cost associated with the management of all the Credit Union assets. This metric is an indicator of the degree of operational efficiency or inefficiency.

◦ Items Required: A- Total Operating Expenses (exclusive of

Provisions for loan losses); B- Total Assets of Current year-end; C-Total Assets as of Last year-end.

◦ Formula : (A)/[(B+C)/2].

3.3d.1 Key PEARLS Return and

Cost Ratios

Page 36: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

R12. Net Income / Average Assets (ROA)

◦ Purpose: To measure the adequacy of earnings and also, the capacity to build Institutional Capital.

◦ Items Required: A- Net Income (After dividends); B- Total Assets

of current year-end; C-Total Assets as of last year-end.

◦ Formula : (A)/[(B+C)/2].

3.3d.2 Key PEARLS Return and

Cost Ratios

Page 37: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Liquidity Goals (Excellence)

1. Liquid Assets - ST Payables / Total Deposits 15-20%

2. Liquidity Reserves / Total Savings Deposits 10%

3. Non-Earning Liquid Assets / Total Assets < 1%

3.3E PEARLS :Liquidity

Page 38: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

L1. [Liquid Assets – Short-term Payables ]/ Total Deposits

◦ Purpose: To measure the adequacy of the liquid cash reserves to satisfy deposit withdrawal requests, after paying all immediate obligations <30 days.

◦ Items Required: A- Total Earning Liquid Investments; B-Total

Non-Earning Liquid Assets; C-Total Short-term Payables <30 days; D- Total Savings Deposits;

◦ Formula : (A + B -C)/(D).

3.3e.1 Key PEARLS Liquidity Ratio

Page 39: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Signs of Growth (Annualized Rates) Goals (Excellence)

1. Net Loans ˆE1=70-80%

2. Liquid Investments ˆE2 ≤ 16%

3. Financial Investments ˆE3 ≤ 2%4. Non-financial Investments ˆE4=0%

5. Savings Deposits ˆE5=70-80%

6. External Credit ˆE6=0-5%

7. Member Shares ˆE7 ≤ 20%

8. Institutional Capital ˆE8 ≥ 10%

9. Net Institutional Capital ˆE9 ≥ 10%

10. Membership ≥ 15%

11. Total Assets > Inflation + 10%

3.3g PEARLS :Signs of Growth

Page 40: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

S11. Growth in Total Assets

◦ Purpose: To measure the year-to-date growth of Total Assets.

◦ Items Required: A- Total Current Assets; B-Total Assets as of the

Last year-end; ◦ ◦ Formula : [(A/B)-1]*100.

3.3e.1 Key PEARLS Total Asset Growth Ratio

Page 41: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

PEARLS RATIO ACRONYM

COMMON GROUND

ACRONY

M

CAMELSRATIOS

P1. Loan loss allowances/ Delinq Loans> 12.

P6. Net Val. Assts/Total Shares & Deposits (Solvency)

Capital/Risk-Weighted Assets

E1. Net Loans / Total Assets.

E.9. Net Institutional Capital / Total Assets

Non-Perf. Loans/Total Gross Loans

A1. Total Loan Delinquency / Gross Loan Portfolio.

A2. Non-Earning Assets/Total Assets.

Return on Assets.

Return on Equity.

Operating Expenses/Total Assets

Net Income/ Average Total Assets (ROA)

Rating (1 -5)

Liquid Assets – Short- term Payables/Total Deposits

Liquid assets to total assets

Growth in Total Assets

??Net open position in foreign exchange to capital

Mapping PEARLS to CAMEL: Establishing Some Common Ground

E

P

A

R

L

S

C

A

M

E

L

S

Page 42: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

4. Reporting Regime for Credit

Union Financial Indicators

PEARLS

Page 43: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

CARTAC has developed a useful reporting regime that can help Credit Unions Regulators collect information from the sector.

The reporting forms have been deployed and adapted in various CARTAC member States, including OECS, Jamaica and Suriname.

4.0 Reporting Regime for Credit Unions

Page 44: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Form Number Main Contents

CU1 Assets and Liabilities

•CU1 – Supp A•CU1 – Supp B•CU1 – Supp C•CU1 – Supp D•CU1 – Supp E•CU1 – Supp F•CU1 – Supp G

•Deposits•Borrowing•Loans•Investments•Receivables and Payables•Interest Rates•Deposit &Loans by Interest Rate &Size.

CU2 Economic Activity

CU3 Income Statement

CU 4 Credit Quality

CU 5A General and Specific Reserves

CU 5B Reconciliation of Allowance for Loan Losses and Change in Equity

CU SUMMARY KEY PEARLS RATIO

4.1 Reporting Regime: EXCEL Work Sheet FORMS

Page 45: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

SWITCH TO PROVIDE A VIEW OF THE REPORTING FORMS IN EXCEL (OECS EXAMPLE)

Page 46: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.0 Application of PEARLS to a Caribbean Credit Union

COK SODALITY CO-OPERATIVE CREDIT UNION LIMITED

Page 47: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

COK Credit Union 2013 2012ASSETS (J$’000s)

EARNING ASSETS 6,369,128.0 6,327,710.0 Loans to Members 4,600,561.0 4,125,625.0 Credit Card Advances 25,472.0 32,775.0 Loan Loss Allowance (-) 110,733.0 120,114.0 Liquid Assets 876,844.0 1,081,200.0 Financial Investments 976,984.0 1,208,224.0

NON-EARNING ASSETS 748,188.0 773,989.0 Liquid Assets 112,910.0 85,744.0

Property Plant and Equipment 231,043.0 256,272.0 Other Non-Earning Assets 404,235.0 431,973.0

TOTAL ASSETS 7117316.00 7101699.00

5.1a Balance Sheet :COK Credit Union

Page 48: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

COK Credit Union 2013 2012

LIABILITIES (J$’000s)

Interest-Bearing Liabilities 6,594,477.0 6,556,733.0

Savings Deposits 4,062,005.0 4,045,737.0

Voluntary Shares 2,185,326.0 2,167,227.0

Deferred Shares 300,000.0 300,000.0

External Credits 47,146.0 43,769.0

Non-Interest Bearing Liabilities 185,117.0 216,065.0

Payables and Accruals 177,104.0 204,895.0

Other Non-interest Liabilities 8,013.0 11,170.0

Total Liabilities 6,779,594.0 6,772,798.0

5.1b Balance Sheet :COK Credit Union

Page 49: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

COK Credit Union 2013 2012

TOTAL LIABILITIES & EQUITY (J$’000s)

TOTAL EQUITY 337,722.0 328,901.0

Permanent Shares 380,613.0 361,865.0

Non-Institutional Capital (609,086.0) (610,981.0)

Institutional Capital 462,466.0 462,466.0 Investment Revaluation Reserve 5,923.0 5,877.0

Loan Loss Reserve - -

Pension Reserve 97,806.0 109,674.0

TOTAL LIABILITIES AND EQUITY 7,117,316.0 7,101,699.0

5.1c Balance Sheet :COK Credit Union

Page 50: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

COK Credit Union 2013 2012

NET INTEREST INCOME (J$’000s)

INTEREST INCOME 794,507 761,084

Loans to Members 648,885 564577

Investments and Deposits 145622 196507

INTEREST EXPENSE -210,890 -210,500

Members' Deposits (160,211.0) (196,241.0)

External Credits (50,679.0) (14,259.0)

NET INTEREST INCOME 583,617 550,584

Provisions for Loan Losses (51,363.0) (101,212.0)

Loans to Members (40,667.0) (91,324.0)

Interest Receivable 1,065.0 9,875.0

Other Assets (11,761.0) (19,763.0)

5.2a Income Statement: COK Credit Union

Page 51: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

COK Credit Union 2013 2012Profit/Loss (J$’000s)

NET INTEREST INCOME (write-offs and Loan Loss Provisions) 532,254.0 449,372.0

NON-INTEREST INCOME/(EXPENSES) 266,782.0 228,916.0

GROSS MARGIN 799,036.0 678,288.0

Operating Expenses 793,845.0 804,325.0

Surplus/Deficit 5,191.0 (126,037.0)

Other Comprehensive Income/Loss (16,323.0) 7,509.0

Total Comprehensive Loss (11,132.0) (118,528.0)

5.2b Income Statement: COK Credit Union

Page 52: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.3a Delinquent Loans: COK Credit Union

DELINQUENT LOANS 2013 (J$’000s)

Period OverdueNum in Arrears

Loans in Arrears

Provision (ratio) Loan Loss Provision

1-2 Months

3,500

298,151 0 0

2-3 Months

956 27,389

0.1

2,739

3-6 Months

665 45,811

0.3

13,743

6-12 Months

824 63,909

0.6

38,345

Between 1-12 Months

5,945

435,260

54,828

Over 12 Months

198 53,661

1.0

53,661

Total

6,143

488,921

1.0

108,489

Page 53: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.3b Delinquent Loans: COK Credit Union

DELINQUENT LOANS 2012 (J$’000s)

Period OverdueNum in Arrears

Loans in Arrears

Provision (ratio) Loan Loss Provision

1-2 Months

2,764

236,874 0.0 0.0

2-3 Months

705 27,562 0.1

2,756

3-6 Months

712 63,566 0.3

19,070

6-12 Months

794 63,891 0.6

38,335

Between 1-12 Months

4,975

391,893

60,161

Over 12 Months

429 55,174 1.0

55,174

Total

5,404

447,067 1.0

115,335

Page 54: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.4a PEARLS RATIOS: COK Credit Union

 COK Credit Union

Benchmark 2013 2012

   

PEARLS RATIO PEARLS RATIO

PROTECTION  

Provision for Loans Delinquent >12 months 

100%  100.00% 100.00%

Provision for Loans Delinquent < 12 months

35% 12.60% 15.35%

EFFECTIVE FINANCIAL STRUCTURE      

Net Loans/Average Total Assets  80%  63.08% 56.40%

Savings Deposits/Total Assets  80%  57.07% 56.97%

Page 55: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.4b PEARLS RATIOS: COK Credit Union

 COK Credit Union

Benchmark 2013 2012

ASSET QUALITY      

Total Delinquency/Gross Loan Portfolio  Max 5%  10.63% 10.84%

Non-Earning Assets/Total Assets Max 5% 10.51% 10.90%

RATES OF RETURN

Operating Expenses/Average Assets  5%  11.89% 12.74%

Net Income/Average Total Assets 2% 7.49% 6.32%LIQUIDITY

Liquid Assets – ST Payables/ Deposits Min 15% 20.01% 23.78%

SIGNS OF GROWTH

Growth in Total Assets Min 10% 0.22 -0.29

Page 56: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

SWITCH TO PROVIDE A VIEW OF THE COK FINANCIALS IN EXCEL (IF TIME PERMITS).

Page 57: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

5.5 PEARLS RATIOS: COK Credit Union

What Conclusions would you draw about COK given the PEARLS Ratios?

Discussion?

Page 58: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

6.0 Database Development for Credit Unions: Often Neglected Area!

Page 59: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Building an Effective Database for Credit Union Requires:◦ Setting up a functional reporting regime.

◦ Mapping and Developing Workflows necessary to support information gathering, analysis and dissemination.

◦ Choosing an effective, affordable, flexible and scalable database system. Good Examples include:

Sungard’s FAME/MARKET MAP (Data Warehouse) http://financialsystems.sungard.com/solutions/market-data/market-map/

analytic-platform

Vizor (Newly available system specifically for financial sector regulators). http://vizorsoftware.com. http://www.youtube.com/watch?v=ksR3TgFbnaU (DEMO OF VIZOR)

6.1 Database Development for Credit Unions

Page 60: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

SWITCH TO PROVIDE A VIEW FAME and VIZOR (IF TIME PERMITS).

Page 61: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Building an Effective Database for Credit Union Requires:

◦Building a reliable IT Platform.

◦Keeping current with IT innovations and database enhancements and that can impact the sector positively.

6.1 Database Development for Credit Unions

Page 62: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

7.0 Imperatives for Enhanced Regulation of Credit Union Sector.

Page 63: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Organize Reporting Regime & Database System;

Invest in and Upgrade IT Resources;

Push for Infusion of Expertise in Finance, Accounting, Economics, Law and IT in Credit Union Regulatory Bodies;

Intensify Regional and International Collaboration on Credit Union Regulatory Matters;

7.1 Imperatives for Enhanced Regulation of Credit Union Sector

Page 64: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

Pay Attention to Financial Stability Developments Globally.

Leverage assistance, where necessary and appropriate from CARTAC and other bodies.

7.1 Imperatives for Enhanced Regulation of Credit Union Sector (Cont’d)

Page 65: Presentation to Credit Union Workshop St. Vincent and the Grenadines By Shelton Nicholls Resident Adviser on Financial Stability, CARTAC.

END OF PRESENTATION