With financial times changing, credit unions must adapt and evolve
The good news is — signs point to continued improvement in the United States economy. The bad news is — many credit unions are poorly positioned to take advantage of these improvements.
Many signs point towards a rosier economic picture in the United States. There is a predicted increase in interest rates in the near future and the Department of Commerce has forecast 2.1%-4.0% growth in the gross domestic product. Other predictions are that interest rates will increase to over 100 bps in the next 6 to 12 months. Growth in the gross domestic product indicates the economy is, in fact, expanding. Given this, the Federal Reserve will probably cut back on buying bonds — tightening the money supply across the board, which in turn leads to higher interest rates. Higher interest rates in the next six months to a year could be problematic for credit unions that are too tied to fixed interest rate loans.
As comfortable as fixed interest rates loans are, credit unions must understand they are an albatross around their necks. Fixed interest rate loans offer lower profit to credit unions. With the predicted growth in the economy and rising interest rates, credit unions are faced with a problematic situation in which they are locked into too many fixed interest rate loans with the majority of more profitable variable interest rate loans passing them by.
Historically, credit unions are inflexible when it comes to adapting their budgets and strategies. This is a challenge credit unions must work to overcome. So, how can credit unions began to take greater advantage of rising interest rates in lending opportunities in the near future?
One answer is to increase their amount of SBA lending. SBA lending is a smart way for credit unions to invest. Increasing the number of member business loans in its lending portfolio is one way for credit unions to address this shortcoming. Unlike fixed interest rate loans, variable interest rate loans, especially those tied into member business lending, help ensure guaranteed returns for the life of the loan. And as an added bonus, many member business loans have lengthy terms, often much longer than traditional fixed interest rate loans (new and used car loans, for example).
A great answer to help mitigate potential losses on fixed interest rate loans is for credit unions to prepare now to take greater advantage of member business loans through the SBA. However, the trick in that comes with credit unions that are historically slow to react to changing conditions and reluctant to adapt business and budget strategies once set in place. In order to realize increased profits and enhanced member service in business lending, credit union should prepare now for the coming changes in the economy and the way in which they serve members.
A great way to learn about member business lending and upcoming changes in the economic situation is to attend the MBL annual meeting. The event is November 5 -6, 2014 in Salt Lake City at MBL headquarters. Seating is limited and early registration is recommended. A terrific panel of industry experts will be on hand to discuss all aspects of member business lending and how credit unions can take advantage of its unique opportunities. For more information, please visit the MBL website at www.MBLLLC.com.
