Financial Sector (Collection of Data) (reporting standard) determination No. 9 of 2018
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This comprises all other entities not classified as households, CSOs, non-financial corporations, and financial corporations.
Scope
The form covers the full range of problem exposures, which ADIs hold, and is not limited to problem loans.
In measuring off balance sheet credit exposures the following measurement policies should be adopted:
Include under balances outstanding for the appropriate impaired asset category (i.e. non-accrual or restructured items), the following:
Any direct credit substitutes (e.g. guarantees, letters of credit, credit derivatives and endorsed bills of exchange as described in the ADI Off Balance Sheet Business Form). For example, where an ADI has guaranteed the financial obligations of a client, and there is reasonable doubt about the ultimate collectability of principal or interest, which the ADI has a contractual obligation to pay under the guarantee, it should be included in the appropriate impaired asset category.
Any commitments, as described in the ADI Off Balance Sheet Business Form. For example, where there is reasonable doubt about the ultimate collectability of principal and interest relating to such commitments, or a provision established, then the balance of the outstanding commitment should be included in the appropriate impaired asset category.
The credit equivalent amounts of market related off balance sheet transactions in the ADI Off Balance Sheet Business Form, which meet the definitions of impaired facilities. The credit equivalent amount must be calculated using the current exposure or mark-to-market method unless another method has been approved in advance by APRA. Potential credit add‑ons should reflect the nature of the individual exposure involved. Derivative transaction exposures should be revalued regularly so as to maintain reasonably current assessments of the extent of credit risk attaching to those transactions.
When reporting the extent of specific provisions raised against all off balance sheet credit exposures, include those recorded in the notes to ADIs' published financial statements as "other liabilities".
Unless otherwise instructed report:
outstanding balances net of interest and other income not taken to profit, and net of any amounts written off;
all items without any adjustment for credit conversion factors (except for market related off balance sheet transactions), risk weights, provisions, and/or collateral arrangements; and
amounts net of offsetting balances available under legally eligible netting arrangements as outlined in Prudential Standard APS 112 Capital Adequacy: Standardised Approach to Credit Risk.
Separately report amounts, where requested, recorded on Australian and overseas books. Guidance on the meaning of “on Australian and overseas books” is provided in the Instruction Guide ARF 320.0.
Specific instructions
Part 1A – Impaired facilities
Impaired facilities are defined (refer to APS 220) as those items for which the ultimate collectability of principal and interest is compromised. Impaired facilities include all problem facilities, off-balance sheet exposures and assets brought on to an ADI’s balance sheet through enforcement of security provisions. They do not include any assets that have been accepted for regulatory purposes as having been cleanly sold for the purposes of APS 120.
Where a facility to a customer or group of related customers is impaired, all other exposures to that customer/group should be aggregated and classified as impaired, subject to exceptions in APS 220.
APRA’s prudential standard on credit quality requires ADIs to classify their impaired facilities as (1) non accrual items, (2) restructured items or (3) other assets acquired through security enforcement (including other real estate owned)
Non-accrual items
For the purposes of this return, non-accrual items are those impaired facilities where estimates of future interest income are zero.
Please refer to APS 220 for more details.
Performance
The return asks ADIs to separately report those non‑accrual items that are subject to no (or immaterial), partial or full performance. APRA’s intention is to better understand the nature of items that ADIs might report as non‑accrual and to enable it to assess the potential impact on the ADI’s overall performance.
No performance – report those exposures on which the ADI is not receiving any material payments. This category should also capture exposures on which an ADI is receiving only sporadic payments.
Partial performance – report those exposures on which the ADI is receiving partial payments relative to the required contractual obligations. Where partial performance is disclosed, ADIs should be able to identify a threshold of performance that defines this category. While it is not APRA’s intention to specify a minimum, the threshold chosen by the ADI should be sufficient to provide a meaningful distinction from the previous category (no performance).
Full performance – report those exposures on which full payments are being received, but which have been placed on a non-accrual basis for another reason. That is, because some reasonable doubt exists about ultimate collectability of the exposure, a specific provision has been raised, or write down taken or some other reasons has prompted this action.
Non‑accrual items – with and without provisions
ADIs should separately report those facilities classified as non‑accrual against which specific provisions have been created and those non‑accrual items against which no specific provision is held. For those ADIs applying the prescribed provisioning methodology described in Attachment C of APS 220 and reported in terms of ARF 220.3 Prescribed Provisioning, provisions so created are regarded as specific in nature and should be reported as such on ARF 220.0.
Restructured items
A restructured item is defined as one in which the original contractual terms have been modified to provide for concessions of interest or principal for reasons related to the financial difficulties of a customer rendering the facility non-commercial to the ADI. In considering whether a facility is non-commercial, an ADI needs to consider whether it would extend credit on similar terms and conditions to a new borrower exhibiting similar risk characteristics. A formal (written) agreement must exist between the ADI and borrower before a facility can be classified restructured.
It is APRA’s general expectation that restructured facilities will not represent a substantial part of an ADI’s total assets.
Restructured items – with and without provisions
Restructured items should be split into those against which there are no specific provisions held and those with provisions that have arisen as part of the restructuring arrangement. The value of specific provisions held against the latter should also be reported. Report only those specific provisions raised prior to, or at the time of, the restructuring. If specific provisions are raised subsequent to the restructuring, the facility should be classified as non‑accrual. The category of restructured with specific provision is primarily designed to address those few instances where ADIs, in employing their problem asset management strategies, create a specific provision ahead of virtually certain write‑off. Please refer to APS 220 for more details.
It is APRA’s general expectation that the extent of facilities reported in this category will be minor and unlikely to continue to be reported in this category for a long period of time.
Other real estate owned (OREO)
OREO is defined as real estate acquired by an ADI in full or partial settlement of a loan or similar facility through enforcement of security arrangements. This category excludes real estate acquired for occupation by ADI staff, and property controlled under “mortgagee in possession” rights. Please refer to APS 220 for more details.
Report holdings of OREO at fair value. The assets should continue to be reported until the ADI has disposed of the holding.
Other assets acquired through security enforcement
This category covers assets, other than real estate assets, acquired by an ADI in full or partial settlement of a loan or similar facility through enforcement of security arrangements (e.g. debt-for-equity swaps). Report the value of other assets acquired through security enforcement at fair value after taking into account any appropriate discount factor attributable to uncertain market liquidity conditions. This latter point reflects the likely lack of demand for the asset that has resulted in the ADI holding the asset as a consequence of its exposure recovery activity. Continue to report these assets until they have been sold or the entire exposure is written off.
New impaired facilities
Report the value of exposures newly classified as impaired during the quarter.
Specific provisions
As noted above, report the amount of specific provisions held against the relevant categories for non‑accrual items, restructured items, OREO and other assets acquired through security enforcement.
Security held against non-accrual items
Report separately the total value of security held against non-accrual items depending upon whether specific provisions are held or not (items R00913 and R00914 respectively). Should any security held exceed the outstanding balance of an individual non-accrual item the excess should be excluded.
Security held against restructured items
Report separately the total value of security held against restructured items depending upon whether specific provisions are held or not (items R00915 and R00916 respectively). Should any security held exceed the outstanding balance of an individual restructured item the excess should be excluded.
Interest/income received
ADIs are asked to report interest, fees, etc. actually received during the quarter from borrowers/counterparties in relation to those exposures classified as impaired (non‑accrual, restructured and assets acquired through security enforcement).
In some cases, ADIs may deem to have received income if there has been a debit to some form of working account. However, in order for this income to be recognised for the purposes of this return, the working account must:
not be established for the sole purpose of meeting interest obligations;
remain within approved limits; and
exhibit the character of a working account implying that the account balance will fluctuate and not result in interest being continuously capitalised.
ADIs should calculate the effective interest rate being earned on restructured items by reference to the principal outstanding following restructuring (i.e. after taking into account write-offs, provisions that arise as part of the restructuring arrangement or repayments in the form of assets or equity). A restructured facility must be earning a rate of interest that is equal to or greater than the ADI’s average cost of funds at the date of the restructuring. If this is not the case, the facility should be classified as non-accrual.
Report the value of income brought to account during the quarter from assets acquired through security enforcement (including other real estate owned). Any income received should be reported net of identifiable expenses (apart from funding costs) incurred in generating such income. Where, in aggregate, expenses exceed income received, report a negative balance.
Interest/income forgone
For all categories of impaired facilities, report all interest/income foregone during the quarter. Interest/income foregone is defined as the difference between what the ADI would have received had the exposure performed as contracted and that interest/income actually received. ADIs are asked to report the extent of interest/income foregone on non‑accrual and restructured items for the relevant quarter covered by the return.
Part 1B – Impaired facilities
Part 1B classifies the total balance of impaired facilities by sector.
Part 2A – Past due items
As items that are 90 days past due but well-secured[5] represent a higher degree of risk than facilities meeting contractual arrangements, APRA requires ADIs to separately report these items. A facility subject to a regular repayment schedule is regarded as “90 days past due” when: (a) at least 90 calendar days have elapsed since the due date of a contractual payment which has not been met in full; and (b) the total amount outside contractual arrangements is equivalent to at least 90 days worth of contractual payments. Such a facility is regarded as well-secured when the ADI judges that the fair value of associated security is sufficient to ensure that the ADI will recover the entire amount owing. By way of example, and assuming monthly repayment instalments, if a contractual payment was made on 30 March, the facility is past due when the payment on 30 April is not made. Assuming no further payments and monthly instalments, the facility should be classified as 90 days past due on 30 July. ADIs will note that this represents 120 days since a payment was made but the equivalent of 90 days worth of contractual payments being past due.
An item ceases to be classified as past due when arrears have been reduced so that the exposure is no longer 90 days past due.
In the case of facilities that do not have a preset repayment schedule (e.g. overdrafts and revolving credit facilities), 90 days past due refers to the period where facilities have remained continuously outside approved arrangements but are well-secured.
The return asks ADIs to separately report those exposures that are individually managed and those that are managed on a portfolio basis.
Individually managed facilities
These are troublesome exposures that are managed on a transaction basis and typically subject to individual review. As discussed below, ADIs should separately report those facilities 90 days past due but well-secured in terms of different credit products common in the Australian financial system. That is, separately report these troublesome exposures as revolving credit, credit cards, housing loans, term loans, lease financing or other loans.
Portfolio managed facilities
Exposures managed on a portfolio basis are typically homogenous and often approved and managed using statistical management techniques. Portfolio managed exposures are often not subject to formal regular review other than in cases where payments are behind agreed repayment schedules or indebtedness is outside approved limits.
Any past due facilities managed on a portfolio basis can be excluded from the definition of impaired facilities and remain on an accrual basis until the dollar value of contractual payments is up to 180 days past due (i.e. six months worth of repayments). The commencement of the 180 days is to take place from the date on which the contractual payment of principal and/or interest is not met. Once the dollar amount of past due amounts represent 180 days of contractual payments, an ADI should decide whether it is prepared to subject the accounts to individual review or to write them off. If the ADI chooses to conduct individual reviews, then the facilities can remain on an accrual basis if the ADI is satisfied that the facility is well-secured. Where the facility is not well-secured, the ADI should immediately create an appropriate specific provision and move the facility to a non-accrual basis.
ADIs managing facilities on a portfolio basis should report the total value of facilities 90 days past due but less than 180 days past due. As for individually managed facilities, ADIs should separately report in terms of loan type. For all category of loan product sought, distinguish between those exposures that are recorded on Australian or overseas books.
To provide APRA with a basis upon which to gauge the degree of delinquency in facilities managed on a portfolio basis, ADIs should separately report the total portfolio size in terms of the individual credit product type specified below. APRA also asks those ADIs managing facilities on a portfolio basis to indicate the extent of portfolio-related provisions that have been created with respect to those facilities that are less than 90 days past due.
Revolving credit
A revolving credit is a credit facility that is typically approved for a given period of time but does not have a fixed repayment schedule.
Report the total outstanding balance of loans of a revolving credit nature that fall within the definition of the relevant category of past due reporting. Exclude loans to Australian householders for the purpose of housing (e.g. equity lines of credit secured by residential property). Facilities of this nature should be reported under “Housing loans”.
Credit cards
Credit cards are a common consumer credit arrangement that allows the consumer the option of borrowing against a pre‑approved line of credit. They are typically unsecured.
Report the total outstanding balance of credit card facilities that are outside contractual arrangements for more than 90 consecutive days but are well-secured under the heading “Individually managed facilities”. Any credit card facility that is not well-secured but is outside contractual arrangements for more than 90 consecutive days should be classified as non-accrual unless it is managed as part of a portfolio as described in APS 220.
Report the total outstanding balance of credit card facilities that are managed on a portfolio basis but are more than 90 days past due and less than 180 days past due.
Housing loans
For the purpose of this return, housing loans are those facilities, both amortising and line of credit that are primarily secured by a registered mortgage over a residential property. They may be for any purpose including the construction, purchase of dwellings for owner occupation or investment or commercial ventures.
Report the total outstanding balance of housing loans that are past due in accordance with whether facilities are managed on an individual or portfolio basis.
Term loans
Report the total outstanding balance of loans that have a fixed term and are past due in terms of the above guidance. Exclude loans to householders for the purpose of housing.
Lease financing
Leasing finance is a method of financing the acquisition of an asset (e.g. motor vehicle or business equipment) by the user under which the ADI buys the asset from a third party and leases it to the user in return for lease rental payments. A component of the lease rental payment relates to interest and another component to the reduction of principal.
Report the total outstanding balance of lease financing that is outside contractual arrangements in line with the preceding guidance.
Other loans
Report the total outstanding balance of loans that satisfy the preceding criteria with respect to being 90 days past due or more that cannot be readily classified in the other credit product types.
Facilities for which a prescribed provision is raised
All facilities against which an ADI is required to raise a prescribed provision in terms of APS 220 will need to be recognised as a non‑accrual item for the purposes of this return and in its financial accounts. ADIs applying the prescribed provisioning methodology should be particularly alert to those Category Four Facilities that are irregular for more than 14 days. Facilities in this category must be reported as non‑accrual from the date that the prescribed provision is struck (i.e. once the facility is irregular for more than 14 days).
Part 2B – Past due items
Part 2B classifies the total amount of past due items by sector.