APRA expands capital concession for COVID-impacted loans

The Australian Prudential Regulation Authority (APRA) has issued a letter to authorised deposit-taking institutions (ADIs), informing them that it has amended paragraph 8 of Prudential Standard APS 220 Credit Quality (APS 220).

The regulator has removed a requirement under paragraph 8 of APS 220, which prohibits lenders from restructuring a loan subject to COVID relief more than once.

As a result, temporary capital concessions granted by APRA in the wake of the pandemic will apply to COVID-impacted loans that have been restructured on more than one occasion.  

The revision has been made following consultation with the banking sector, which called on the regulator to provide “additional flexibility” for restructures in light of continued uncertainty in the economic environment.

“APRA expects that all restructures will be genuine attempts to return borrowers to a long-term sustainable repayment structure,” the regulator stated.

“However, in extreme circumstances, such as in the event of further lockdowns or further restrictions on activity, additional restructuring may be appropriate.”

Moreover, APRA informed ADIs that paragraph 7 of APS 220 has been amended to clarify that banks may “reset the arrears count to zero” for loans modified to adjust for loan deferral periods and any existing delinquencies.

“Specifically, where an ADI extends the maturity or increases repayments over the remaining loan term to adjust for prior missed repayments, arrears can be reset to zero,” APRA stated.

“Similarly, where an ADI restructures the loan under paragraph 8, it may also reset arrears to zero.

“Otherwise, APRA expects ADIs to resume the arrears count from the number of days past due at the time the repayment deferral was provided.”

APRA urged banks to be “proactive in transitioning borrowers through this period of disruption” and ensuring there is a “timely and orderly return” to the regulator’s pre-COVID prudential framework.

The temporary concessions are due to expire on 31 March 2021, which APRA claimed provides ADIs with “significant flexibility” to manage the transition.  

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