APRA has preserved this AFIC Practice Note as guidance for building societies and credit unions.
PRACTICE NOTE 10/93
16 JUNE 1993
MINIMUM LOAN PROVISIONING: COLLATERAL SECURITY
Under Prudential Standards 2.3.2.a, 3.3.2.a and 4.3.2.a certain minimum provisioning requirements are imposed for bad and doubtful debts. The level of provisioning required is in part dependent upon whether mortgage security is held by the society and, if so, the status of that mortgage security.
Circumstances may arise where a debt owing to a society, although not secured by mortgage, may be secured by "blue chip" security which may constitute equivalent or even better collateral than a registered mortgage.
For that reason, the AFIC Board has agreed to amend the Prudential Standards to provide that where a loan is secured other than by mortgage by equivalent or better security arrangements the society may on application to its SSA seek to have the provision adjusted to reflect the whole or part of the collateral value. After consideration of all relevant circumstances pertaining to the loan and the security the SSA may reject or may, with the consent of AFIC, agree to the application.
In order to ensure that adequate guidelines are established for consideration by societies and SSA's, before making application to AFIC, Book 2 of the Prudential Standards will be amended to the following effect:
Prior to making a recommendation that AFIC consent to an application, the SSA should be satisfied as to the quality of the security. The following examples are offered as guidance:
Guarantees provided by Commonwealth or State Governments, or Australian licensed Banks may be deducted from the loan at full value prior to applying statutory provisioning requirements.
Crown leases may be considered to be real property and where the loan is secured by mortgage over the lease the value may be deducted in accordance with (iii) All Other Loans (subject to valuation).
Bank bills and Government securities held as collateral if subject to enforceable security in favour of the society, may be deducted from the loan at full market value prior to applying statutory provisioning requirements.
Cash on deposit with a society may only be deducted for the purposes of provisioning where the deposits are secured by appropriate contractual arrangements. A right of offset is not considered to provide appropriate security per se.
Once reviewed by the SSA, applications for recognition of security for the purposes of provisioning must be referred to AFIC, together with the SSA's recommendation.
Whilst it is not expected that non-mortgage collateral security which satisfies these high standards will frequently be in place, it is desirable that flexibility be available to recognise such security when it exists. Societies having a valid case for consideration under these proposals should in the first instance make application to their SSA which will then decide whether nor not to seek AFIC's consent to the application.
