Credit union cooperatives have mushroomed in Thailand, but regulation has failed to catch up to such rapid growth.
Klongchan Credit Union Cooperative's 12-billion-baht embezzlement scandal has underscored the lax regulation and enforcement, signalling a problem that could snowball in the future and cause major damage if regulations are not fixed.
Even though credit cooperatives run similar operations to banks in terms of deposits and lending, they are not supervised by the Bank of Thailand nor the Finance Ministry. The Cooperative Promotion Department under the Ministry of Agriculture and Cooperatives is in charge of supervising cooperatives across the country.
Therefore, credit union cooperatives are not required to comply with the stringent regulations governing financial institutions, like setting aside loan-loss provisions, a source at the Finance Ministry said. The provision is an expense set aside as an allowance for bad loans, and this can help provide financial institutions with security against future uncertainties.
As they are not financial institutions, credit union cooperatives cannot ask for financial assistance from the Financial Institutions Development Fund (FIDF) if they have a financial crisis. More importantly, depositors' money is not protected by the Deposit Protection Agency (DPA).
Cash-strapped Klongchan Credit Union Cooperative came under the limelight after its members could not withdraw their own money. The 13 members of the cooperative's board chaired by Supachai Srisupa-aksorn were sacked by the Cooperative Promotion Department chief earlier this month after the board was accused of defrauding its members out of billions of baht.
The Department of Special Investigation (DSI) and the Anti-Money Laundering Office (Amlo) is investigating charges of fraud allegedly committed by former executives of the Cooperative. The DSI found the cooperative lent 12 billion baht to 27 borrowers, and those loans went bad with 1.2 billion baht in overdue interest. The 12 billion baht in loans accounted for 80% of the cooperative's lending extended last year.
A Finance Ministry source said a credit union cooperative is a good system as it allows people with the same occupation or living in the same community to help one another and take part in selecting executives with a one man, one vote theory.
But pressure from yield-hungry members who disregarded risk principles compelled cooperative executives to take higher risks in the hopes of a better return in a bid to secure their jobs.
"Eventually, it hinges on credit union cooperatives' members setting the direction of their cooperatives," said the source.
As of August this year, there were 1,305 credit union cooperatives nationwide with a combined 1.29 million members, total assets of 66.2 billion baht, deposits of 30.9 billion and loans outstanding of 43.7 billion.
A credit union cooperative is one of seven types of cooperatives in Thailand. The others are agricultural, land settlement, fisheries, consumer, savings and credit and service.
In January this year, there were 8,087 cooperatives across the country, 953 of which were shut down. They had over 11 million members, with agricultural cooperatives dominating the total with 55%.
At the end of 2012, embezzlement and mistakes were listed to account for 1.01 billion baht in troubled money at 652 cooperatives.