The importance of the risk management function has once again been highlighted by Australian Prudential Regulatory Authority (APRA) in a letter that has been addressed to the nation’s lenders.
The letter, which is addressed to all authorised deposit-taking institutions (ADIs), focused on the thorny issue of issuing loans when hardship concessions are granted – and how a lender should go about risk profiling the loan applicants.
“ADIs must have a full understanding of the risk profile of loans granted hardship forbearance and ensure the risks are appropriately reflected in internal management reporting, provisioning and capital adequacy calculations. APRA has seen some instances of ADIs re-ageing arrears on loans granted such concessions in order to prevent the triggering of collections processes. While this practice may be reasonable from an operational perspective, it can obscure prudent internal and regulatory reporting of past-due and impaired loans,” said the letter.
“APRA has addressed the reporting issues with individual ADIs from time to time and is now issuing this guidance to ensure industry-wide consistency. Importantly, this guidance pertains to the measurement and reporting of loans and does not affect ADIs' management of lending relationships with borrowers.”
When it comes to risk assessments, the regulator has stated its expectation that ADIs monitor trends in requests for, and approvals of, hardship concessions and conduct regular assessment of the default and loss characteristics of these loans.
“This means that an ADI must have in place data and systems to allow it to readily identify, measure and report internally on hardship arrangements,” said the letter.
It adds the following examples of key metrics that ADIs should monitor:
number, dollar amount and reasons for new requests for hardship concessions, by product type;
number, dollar amount and types of new and outstanding hardship concessions granted; and
cure rates, provisions and ultimate loss rates on hardship concession loans.
“ADIs are expected to adopt loan-loss provisioning methodologies for loans granted hardship concessions that recognise the higher risk status of these loans and the increased likelihood that they may result in losses for the ADI,” said APRA.
Click here to read the guidelines in full.