CRED 10.5 Provisioning
A credit union must1 make adequate provision for bad and doubtful debt.
- (1)
A credit union must3 make specific provision in its accounts for bad and doubtful debts of at least the amounts set out below:
- (a)
35% of the net liability to the credit union of borrowers where the amount is more than three months in arrears; and
- (b)
100% of the net liability to the credit union of borrowers where the amount is more than 12 months in arrears.
- (a)
- (2)
The net liability of a borrower is the amount of his loan and interest outstanding, less his shareholding. 1
- (1)
A credit union should maintain a general provision for bad and doubtful debts of at least 2% of the net liability to the credit union of borrowers not covered by the specific provisions in CRED 10.5.2 R.1
- (2)
Contravention of CRED 10.5.3 E (1) may be relied on as tending to establish contravention of CRED 10.5.1 R.
In order to comply with the requirements of CRED 10.5.1 R - CRED 10.5.3 E it follows that it will be necessary for a credit union to review its provisioning requirements frequently. The FSA recommends that this is done at least quarterly.1
A credit union should make it its business to know its customers and, in conjunction with its auditor, make a judgement on the degree of risk of non-payment attached to loans that are in arrears. Provisioning should reflect that judgement.
2Where a delinquent loan is rescheduled and the arrears capitalised, the loan should be regarded as remaining impaired until there is sufficient evidence that it is performing on the rescheduled terms. In the meantime, any provision made in relation to that loan should be maintained, not released.
- (1)
1CRED 10.5.2 R requires a credit union to maintain minimum levels of specific provision. However, a credit union that only maintains the minimum levels does not necessarily comply with CRED 10.5.1 R. This will depend on the assessment and judgement referred to in CRED 10.5.5 G.
- (2)
- (a)
Failure to maintain a general provision of the level indicated in CRED 10.5.3 E creates a presumption that the credit union is not complying with CRED 10.5.1 R, though that presumption can be rebutted by the credit union: for example, it may be able to demonstrate that the occurrence of impaired loans that are either below the threshold for specific provision (that is, they are less than three months in arrears) or are unidentified at the time, is very low.
- (b)
If, on the other hand, a credit union does maintain the indicative level in CRED 10.5.3 E, that does not necessarily mean that it complies with CRED 10.5.1 R.
- (a)
1If a credit union needs to make higher provisions, beyond the levels in CRED 10.5.2 R and CRED 10.5.3 E, in order to meet CRED 10.5.1 R, then it should do so.