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Debt Collection & APRA Provisioning Guidelines

Thursday, October 01, 2009 - Posted by Philip Harvey

The effectiveness of your organisations Debt Collection has a direct impact on the Provisions for Bad Debts your organisation must make. Provisions for Bad Debts are expenses to your organisation that can add up very quickly and can threaten the profitability of your organisation on a poor performing ledger.

As a collector, have you ever completely understood why you are sometimes put under intense pressure to reduce the arrears, order new valuations and consequently, reducing the required provisioning? By summarising the APRA Provisioning Guidelines (Guidance Note AGN 220.3) below, we hope to increase your understanding. Please take note that your own organisations provisioning guidelines may be different to the APRA Guidelines (ie more conservative). 

The provisioning guidelines are divided into 4 categories based upon the associated risk of each Loan Type, being;

  1. Category 1 - Well-Secured Facilities,  including;
    • a residential fully mortgage insured registered 1st mortgage,
    •  a residential registered 1st mortgage where the loan balance is less than or equal to 80% of the property value (without mortgage insurance) Note: Where the exposure is 90 days or more worth of payments past due, and the valuation must be no older than 12 months
    • a residential registered 2nd mortgage where;
      •  the value 1st mortgage + the value of the 2nd mortgage is less than or equal to 80% of the property value and the first mortgage cannot be extended without it being subordinated to the second mortgage OR
      • the value 1st mortgage + the value of the 2nd mortgage is between 80 & 100% of the property value and the first mortgage cannot be extended without it being subordinated to the second mortgage AND the outstanding balance is 100% mortgage insured
  2. Category 2  - Registered 1st Mortgages on residential properties where the total loan balance (less any component that is mortgage insured) is between 80% - 100% of the property value (where the loan is 90 days or more worth of payments past due, the valuation must be no older than 12 months).
  3. Category 3 - Personal & Commercial Loans (Secured & Unsecured) and mortgage loans where the Total Loan balance less any mortgage insurance is greater than 100% of the Property Value. Please note that APRA do also allow some exemptions which can be applied for in this category.
  4. Category 4 - Overdrawn Savings Accounts and Overdrawn Limits on credit cards, overdrafts and line of credit facilities.

The % of the Total Loan Balance that must be provisioned per APRA Guidelines is determined by the number of days in arrears the borrower is in meeting contractual obligations. The categories & percentages are outlined below;

                                            % Provision Required by Category

# Days in Arrears Cat 1 Cat 2 Cat 3 Cat 4
0-13 Days 0% 0% 0% 0%
14-89 Days 0% 0% 0% 40%
90-181 Days 0% 5% 40% 75%
182 - 272 Days 0% 10% 60% 100%
273 - 364 Days 0% 15% 80% 100%
365 + Days 0% 20% 100% 100%

You can see as a Collector how the performance of your arrears ledger will have on your provisioning when you apply the above matrix.

For Category 1 & 2, the guide mentioning a valuation that is not older than 12 months becomes important. For example, if you had a category 1 loan without mortgage insurance that was more than 90 days in arrears without  a valuation performed in the last 12 months, this would Default to be a Category 3 loan. Lets attach a loan value of $100,000 to this example, this means that instead of having a provision of zero, a provision of $40,000 would be required, going straight to your organisations bottom line. 

Another important consideration for your Category 1 (& somewhat category 2) Loans is the potential consequence of doing nothing when an account is in arrears. We have seen examples of case law where due to inaction / slow action of the lender that has lead to excessive interest & fees being accrued against the loan, the Courts reversing these excessive amounts in favour of the borrower. The key point to remember is though your provisioning is not impacted, if your lack of action is to the financial detriment of the borrower, the Court may award in favour of the borrower for the amount of the financial loss suffered from the lack of action.

The full APRA Guidance Note (AGN 320.3) can be located on the APRA Website.


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