APRA updates regulatory approach to loans subject to repayment deferral

The Australian Prudential Regulation Authority (APRA) today announced an extension of its temporary capital treatment for bank loans with repayment deferrals, as well as temporarily adjusting the capital treatment of loans where terms are modified or renegotiated (‘restructured’).

On 23 March 2020, APRA announced that banks that offered borrowers impacted by the COVID-19 pandemic an option to defer repayments for a period of up to six months need not treat the repayment deferral period as a period of arrears for capital adequacy and regulatory reporting purposes.

APRA will write to all Authorised Deposit-taking Institutions (ADIs) this week, advising that this regulatory approach will be extended to cover a maximum period of 10 months from the start of a repayment deferral, or until 31 March 2021, whichever comes first. 

APRA’s expectation is that ADIs grant new or extended loan repayment deferral arrangements after undertaking an appropriate credit assessment to ascertain if an extension or new deferral is appropriate for the particular borrower given their circumstances. 

APRA will also provide an adjustment to the normal regulatory treatment of loans that are restructured. Where an ADI restructures an affected borrower’s facilities before 31 March 2021 with a view to putting the borrower on a sustainable financial footing, the loan may continue to be regarded as a performing loan for capital and regulatory reporting purposes. 

Given the volume of deferrals, APRA considers it reasonable to provide ADIs more time to determine the best approach for each borrower. While some customers are able to return to making normal payments in the near future, for others it may be preferable for an ADI to restructure or renegotiate the loan to provide a revised repayment schedule. In some cases, banks will need to recognise that loans are permanently impaired. 

APRA Chair Wayne Byres said: “These measures are designed to incentivise ADIs to continue to support their customers through an extended period of uncertainty, while at the same time facilitating the restructure of eligible loans in a measured and timely manner. 

“We are fortunate that the Australian banking system has the balance sheet strength to be able to provide ongoing support to customers temporarily impacted by COVID-19. This will help to avoid unnecessary hardship and foreclosures, and allow the banking sector to work with its customers to find the best solution to manage their debts,” Mr Byres said.

ADIs are expected to have a comprehensive plan that demonstrates how they will systematically work through the large volume of impacted customers, as well as avoid operational constraints as deferral periods come to an end. 

To maintain transparency, APRA will also require ADIs to provide regular disclosures regarding the status of their deferred, restructured and impaired loan portfolios. APRA also intends to publish monthly aggregate data on the extent and nature of loans currently subject to repayment deferrals.

APRA has consulted with the Australian Securities and Investment Commission (ASIC) to confirm these measures are compatible with ADIs’ obligations to customers.  

APRA will actively supervise the implementation of these measures and continue to engage with industry to support impacted customers and facilitate the recovery of the Australian economy.  

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