By Gabriel Chen

MEMBERS of credit cooperatives may soon get lower annual payouts, with changes in the works to limit the types of investments these societies can make.

Credit co-ops, which encourage thrift by accepting deposits from members and helping them with loans, have so far not faced restrictions on how they invest their funds in stocks and bonds.

But the Registry of Cooperative Societies told them at a private meeting last month that they will no longer be able to make certain investments, such as in shares, unit trusts and corporate bonds, from June30.

This could reduce the annual returns that members get from putting their money with these co-ops, currently estimated at between 3 per cent and 4per cent on average.

There are 84 co-ops in Singapore, according to the website of the Ministry of Community Development, Youth and Sports (MCYS), which regulates them via the Registry.

Of these, 38 are credit co-ops, with members totalling an estimated 200,000 to 250,000. For now at least, the new rules are said to affect only credit co-ops.

The Straits Times understands the co-ops were told that they will be able to buy only Singapore government securities and statutory board bonds, keep existing shares in co-ops such as FairPrice, or place Singapore dollar deposits in banks.

The co-ops will also have to pare their holdings of restricted investments to 10per cent of their total assets over a period of five years.

An MCYS spokesman said the Registry will announce the requirements and time frame for implementation as they are firmed up, but that the requirements will be introduced gradually from this year.

He said the aim is to help credit co-ops focus on their core social role of encouraging thrift and providing loans to members. As part of these requirements, some limits may be set on the amount of risky investing that credit co-ops can undertake, he said.

But some co-ops say the restrictions will make it harder for them to generate the same financial returns in the future.

While stocks and corporate bonds are riskier assets, they also have the potential to give co-op members a much higher return than, for example, bank deposits.

There is no publicly available data on the average returns of credit co-ops.

But Mr Leong Sze Hian, president of the Society of Financial Service Professionals, estimates credit co-ops pay out between 3 per cent and 4 per cent in annual returns on average. This could fall to between 2.5 per cent and 3.5per cent, he said.

However, not all co-ops will be equally affected by the changes. Those that have few investments and lend out most of their funds, channelling some of what they make from loans to members, will be less affected.

But co-ops that put a significant part of their members' savings into investments that generate returns are likely to be harder hit by the new rules.

Take The Straits Times Press Cooperative Thrift and Loan Society (ST Co-op), which has about 80per cent of its funds placed in bonds and equities.

'If we sell off our equities, the capital gains are very good, and paying 2 per cent to 3per cent dividend and interest should not be a problem,' said ST Co-op chairman Chow Fong Leng. 'But what happens after five years? There will be no more supplemental income from bonds interest and dividends from equities.'

Given this uncertainty, ST Co-op is capping members' contributions. New members will only be able to put in up to $500 or 25per cent of the basic salary a month, whichever is lower.

The Singapore Teachers' Cooperative Society, with at least 20per cent of its funds in stocks and bonds, is also feeling the heat.

'If we can get more leeway, this will help us generate more income and hence more dividends for our members,' said honorary treasurer Chua Poon Guan.

On the other hand, TCC Limited, which pays members 3per cent a year, has less than 1per cent of its total assets in investments.

'We are not affected,' said TCC chairman R. Theyvendran.

TCC allows anyone to join.

This article was first published in The Straits Times.