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If the cooperatives of the island -which are under the Cossec government regulation- were a single entity, they would occupy the third place among the financial entities of Puerto Rico. (GFR Media)
If the cooperatives of the island -which are under the Cossec government regulation- were a single entity, they would occupy the third place among the financial entities of Puerto Rico. (GFR Media)

The plan for the Cooperatives Supervision & Insurance Corp. (Cossec, Spanish acronym) includes some messures such as reconfiguring its board of directors, updating regulations that were not reviewed for a decade, identifying cooperatives at risk and facilitate the sector consolidation and, even, increasing the premiums to insure deposits at a 1 percent per year annual rate.

An updated document, disclosed by the Fiscal Agency and Financial Advisory Authority (FAFAA) last Friday midnight, says it is about a total transformation of Cossec, which in turn should change the operation of the cooperative savings and credit sector in Puerto Rico for good, according Ivelisse Torres Rivera, chairwoman of Cossec and commissioner of the Puerto Rico Development Commission, and the vice president of the entity, Pedro Roldan.

But it is also an effort to keep the sector afloat, after 90 of the 115 cooperatives invested in government bonds and now are exposed to losing much of the money they lent to the Treasury in the debt restructuring process under PROMESA Title III that is just starting.

According to the fiscal plan, Cossec plans to use a part of its insurance fund and, if necessary, another $ 250 million from Banco Cooperativo (Cooperative Bank) to rescue the sector like the US government did with some banks during the called Great Recession.

For Torres Rivera, the Banco Cooperativo injection would be a last resort mechanism, as well, as the sale of loans portfolios or other assets to cooperatives or commercial banks. She added that cooperatives also have their own reserves, if necessary.

From the beginning -and for the moment- the process involves the consolidation of five cooperatives, Torres Rivera informed.

The first of these consolidations, which occurred this month, was revealed by El Nuevo Día and it was about the GuaynaboCoop into the Sagrada Familia cooperative.

"There are five high risk cooperatives," Torres Rivera said, highlighting that the GuynaboCoop consolidation was transparent for the partners.

Indisputable role

In an interview with El Nuevo Día, Torres Rivera insisted on the fact that the cooperative system is solid.

"People continue to rely on their cooperative system", said Torres Rivera.

Cossec fiscal plan indicates that, between June and December 2017, cooperative assets grew by $ 180 million and deposits and other obligations of the sector increased by $ 188 million.

According to Torres Rivera, between September and December 2017, the increase in shares and deposits was around $ 288 million.

If cooperatives were a single entity, they would be in the third position, just after FirstBank, among the financial entities of the island, as stated in the fiscal plan.

By the end of 2017, the sector managed $ 8,7 billion and it had about 265 branches. The commercial banking sector had 303 branches right now, according to the Office of the Commissioner of Financial Institutions (OCIF, Spanish acronym).

"In spite of the situation they may face, the system is solid. People should continue to see cooperatives as a real alternative", insisted Torres Rivera, recalling that cooperatives serve a part of the population that, in many cases, has been neglected by commercial banks.

The plan emphasizes that, about 15 days after the emergency caused by Hurricane Maria, 90 percent of the cooperatives provided services to their members and a month after the hurricane, the only financial institution open to the public in 17 Puerto Rican municipalities was the savings and credit cooperative.

The blow of the debt

However, the sector burdens the consequence of having lent to the government, particularly between 2009 and 2012, during the administration of Luis Fortuño. During this period, according to data from Cossec, cooperatives - which until then remained isolated from the fiscal and economic crisis - increased their investment portfolios by almost twice, with Puerto Rican bonds, instruments that do not pay taxes and that were massively acquired by these entities exempted by public policy, from tax payment.

It was authorized by Cossec, right when the formerpresidents of the Government Development Bank (GDB), Carlos M. García and Juan Carlos Batlle, now director of the Oversight Board and advisor on government restructuring, respectively, channelled the GDB recapitalization plans and accumulated debts were refinanced, in order to relieve the government and to bring new cash to the Treasury.

As stated in the fiscal plan, by December 2017, cooperatives had about $ 852 million in Puerto Rican bonds. The value of such bonds had collapsed to about $ 235 million last December.

For Roldan, in the beginning, cooperatives could invest about $ 1,3 billion in government bonds, but over the years, some cooperatives had capital to sell their bonds and record the loss.

In other cases, Law 220-2015, which allows amortization of these losses for up to 15 years, has prevented cooperatives from being de-capitalized at once.

Torres Rivera said that the fiscal plan leaves the statute, that cataloged Puerto Rican bonds as "special investments", unaltered.

Consolidations in progress

However, as included in the fiscal plan, Cossec is forced to create a new margin for possible losses in the cooperative system. In this occasion, the reserve amounts to $ 54 million.

In the fiscal year 2016, Cossec recorded losses for $ 61 million because it had to separate part of its resources to deal with the losses with the Puerto Rican bonds.

Cossec financial report for fiscal year 2017 has already been completed, but not published on the website due to a directive of the Department of the Treasury, that applies to all public corporations, explained Torres Rivera.

"The fact is that although for 2017, the reserves we had were adequate, we understood as good policy, that since the economic situation might bring variations, it was good to have that extra reserve", said Roldan.

Summing up, financial and insurance institutions, such as Cossec, are called to create a kind of piggy bank in case things do not go well. This happens when consumers do not pay their loans on time or if they lose the investment in securities such as Puerto Rican bonds, which would affect the cooperatives cash flow - essential for them to be able to grant loans or honor withdrawals from the accounts - or it could mean the loss of the principal lent.

"The positive part" is that Cossec is working to correct the situation, noted Torres Rivera.

Cossec is immersed in a process of confidential consolidation of cooperatives that are financially or operationally unviable.

Apart from the consolidation between the Sagrada Familia and GuaynaboCoop cooperatives, Torres Rivera said that a second consolidation could be completed before the end of 2018 and a third consolidation could take place early in 2019.

Premiums increase 

The fiscal plan contemplates that, between this current fiscal year and fiscal year 2023, deposit insurance premium income will increase almost by 15 percent, from about $ 23.3 million to $ 27.2 million.

For Roldan, even if there are consolidations, the expectation is that cooperatives will continue to gain deposits.

On the other hand, Torres Rivera explained, the Legislature is already evaluating the bill that will create the resolutions committee, that will operate above Cossec, to define the governance changes needed, composed by the Office of the Commissioner of Financial Institutions (OCIF), FAFAA and Cossec.

Law 220 prevents Cossec from taking action against a cooperative affected by losses over Puerto Rican bonds or against its directors, a matter that Roldan expects to correct. Changes in governance, as well as the capitalization plan for the sector, are requirements established by the Board.