APRA mulls capital relief on loan deferrals

APRA is negotiating with the banks on the post-September future of loan deferrals, with both sides seeking an industry approach.

Australian Prudential Regulation Authority chairman Wayne Byres

The prudential regulator will give further guidance next month about its thinking on deferred loans, as the nation grapples with a looming financial cliff from the October expiry of government support programs and repayment holidays for bank customers.

Australian Prudential Regulation Authority chairman Wayne Byres will address the Trans-Tasman Business Circle on July 22, by which time the regulator will have received extensive data from three-month check-ins by the industry on customers who deferred their loans last March.

The information will help inform APRA’s decision on any extension of the deferrals in return for extended capital relief.

Last March, the regulator announced its approach to the capital treatment of loans deferred for a period of up to six months under COVID-19 support packages for mortgage and business customers. Under the framework, any repayment holiday doesn’t have to be treated as a period of arrears, or regarded as restructured.

As reported in The Australian on Tuesday, APRA is negotiating with the banks over the post-September future of loan deferrals, with both sides seeking an industry approach. While the Australian Banking Association has developed an industry position, the banks are also negotiating individually to avoid unintended consequences arising from their different loan books.

A source close to the negotiations said APRA was rightly concerned about capital relief.

“There was blanket relief for customers on the way in (to the deferral scheme), but it’s not going to be like that on the way out,” the source said. “Other solutions will be examined, like lengthening the term of the loan, using redraw facilities, refinancing at a lower rate, or interest-only repayments.”

Citi analyst Brendan Sproules said regulators were exploring the possibility of providing further capital relief to loan deferrals. “It has been suggested that loans that need further deferral would be characterised into four buckets, with three of the four eligible for further capital and provisioning relief in some form,” he said.

The four categories are understood to include low-risk customers who have resumed repayments after earlier deferrals, and two medium-risk categories comprising customers who had started working some hours but were not yet full-time, and those had some prospects of returning to work once the current lockdown was lifted.

The final, high-risk category included people who were out of work and unlikely to return to paid employment.