APRA has released a discussion paper proposing changes to Prudential Standard APS 220 Credit Quality (APS 220), which requires ADIs to control credit risk by adopting prudent credit risk management policies and procedures. The proposed reforms are due to be implemented on 1 July 2020.

Credit risk refers to the possibility that a borrower will fail to meet their obligations to repay a loan, and is usually considered the single largest risk facing an ADI.

APS 220 was last substantially updated in 2006. To better describe the purpose of the revised standard, APRA proposes renaming it Prudential Standard APS 220 Credit Risk Management.

The discussion paper outlines APRA’s proposals in the following areas:

• Credit risk management – The revised APS 220 broadens its coverage to include credit standards and the ongoing monitoring and management of an ADI’s credit portfolio in more detail. It also incorporates enhanced Board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle;
• Credit standards – The revised APS 220 incorporates outcomes from APRA’s recent supervisory focus on credit standards and also addresses recommendation 1.12 from the Final Report of the Royal Commission in relation to the valuation of land taken as collateral by ADIs;
• Asset classification and provisioning – The revised APS 220 aligns with recent accounting standard changes on loan provisioning requirements, as well as other guidance on credit-related matters from the Basel Committee on Banking Supervision.

Funding third party lenders
APRA has also released a letter to industry expressing concerns related to ADIs’ increasing exposure to funding agreements with third party lenders, including peer to peer (P2P) lenders.
APRA says it has observed an increasing number of small-medium sized authorised deposit-taking institutions (ADIs) participating in, or planning to participate in, initiatives outside their traditional business models. Of particular concern, is the growing number of ADIs entering into funding arrangements with third party lenders, with many of these arrangements involving Peer to Peer (P2P) lenders.
These arrangements have the potential to give rise to higher credit risk for ADIs.