APRA confirms treatment of SME loan schemes

The Australian Prudential Regulation Authority (APRA) has set out its expectations for the credit risk capital treatment of the loans covered by the Coronavirus Small-to-Medium (SME) Guarantee Scheme and the SME Recovery Loan Scheme.

Earlier this month, the federal government announced that it will expand and extend its Coronavirus SME Loan Guarantee Scheme as part of its commitment to support up to $40 billion in lending to SMEs.

The SME Recovery Loan Scheme is specifically targeted at SMEs currently receiving JobKeeper and is only open to recipients of the JobKeeper payment between 4 January and 28 March 2021.

Under the scheme, the government will take on more of the guarantee, moving from a 50/50 backing with banks to an 80/20 split.

The expanded scheme will also increase the size of eligible loans (which can be either secured or unsecured, excluding residential property), increasing from $1 million under the current scheme to $5 million.

The prudential regulator said that both the SME loan schemes, which have been established by the federal government, may be regarded as an “eligible guarantee” by the Australian government for risk-weighting purposes.

APRA set out its expectations in a list of frequently asked questions (FAQs), which it said it has provided as updated guidance to authorised deposit-taking institutions (ADIs) during the period of disruption caused by the coronavirus pandemic.

Explaining further about its expectations around the schemes, APRA said: “For both secured and unsecured lending, the uncovered portion of the exposure must be risk-weighted according to the risk weight applicable to the original counterparty.”

APRA added that in relation to the covered portion of the exposure, ADIs using the standardised approach may apply a risk weight appropriate to the government in accordance with Attachment A to APS 112 Capital Adequacy: Standardised Approach to Credit Risk.

This section of the prudential guidance on risk weights for property exposures states that a property exposure is an exposure that is secured by immovable real property, and an ADI must risk-weight its property exposures according to the requirements detailed in the attachment, with the exception of defaulted residential property.

The attachment states that a loan must meet the various requirements set out in the attachment to be classified as a standard mortgage, including:

• “An ADI must have unequivocal enforcements rights over the mortgaged property at all times, including a right to possession and power of sale in the event of default by the borrower”, and 
• “An ADI’s exposure must be secured by a registered first mortgage over the property, or by a registered second mortgage, which satisfies various conditions”.

APRA also stated that ADIs using the internal ratings-based approach to credit risk may apply a risk-weight derived by using the relevant substitution approach according to the requirements specified in APS 113 Capital Adequacy: Internal Ratings-based Approach to Credit Risk.

According to APRA, the key requirements of this prudential standard are that an ADI must “quantify certain credit risk components to determine the capital requirement for a given credit exposure”, and have approval from APRA to use an internal ratings-based approach to credit risk to determine an institution’s credit risk capital requirement.

In its latest guidance to ADIs via the FAQs, APRA also noted that the SME Recovery Loan Scheme allows lenders to offer a repayment holiday of up to 24 months on appropriate products.

Elaborating further on how this should be treated, APRA said: “Under the definition of ‘restructured facility’ in paragraph 26 of Attachment A to Prudential Standard APS 220 Credit Quality, where an existing borrower is in financial difficulty and accepts a repayment holiday on a loan under the SME Recovery Loan Scheme, the loan must be treated as restructured for prudential reporting and capital purposes.

“The capital treatment in this situation will still benefit from the covered portion being guaranteed by the Australian government.”

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