CREDS 7.5 Provisioning
A credit union must make adequate provision for bad and doubtful debt.
A credit union must make specific provision in its accounts for bad and doubtful debts of at least the amounts set out below:
- (1)
35% of the net liability to the credit union of borrowers where the amount is more than three months in arrears; and
- (2)
100% of the net liability to the credit union of borrowers where the amount is more than 12 months in arrears.
In addition to the requirements of CREDS 7.5.2 R, a credit union should consider making the following specific provisions in its accounts for bad and doubtful debts:
- (1)
60% of the net liability to the credit union of borrowers where the amount is more than six months in arrears; and
- (2)
80% of the net liability to the credit union of borrowers where the amount is more than nine months in arrears.
- (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 CREDS 7.5.2 R.
- (2)
Contravention of (1) may be relied on as tending to establish contravention of CREDS 7.5.1 R.
In order to comply with the requirements of CREDS 7.5.1 R to CREDS 7.5.4 E a credit union should review its provisioning requirements frequently. The PRA recommends that this is done at least quarterly.
A credit union should make it its business to know its customers and, in conjunction with its auditor, make a judgment on the degree of risk of non-payment attached to loans that are in arrears. Provisioning should reflect that judgment.
Where 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)
CREDS 7.5.2 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 CREDS 7.5.1 R. This will depend on the assessment and judgment referred to in CREDS 7.5.6 G.
- (2)
- (a)
Failure to maintain a general provision of the level indicated in CREDS 7.5.4 E creates a presumption that the credit union is not complying with CREDS 7.5.1 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 CREDS 7.5.4 E, that does not necessarily mean that it complies with CREDS 7.5.1 R.
- (a)
If a credit union needs to make higher provisions, beyond the levels in CREDS 7.5.2 R and CREDS 7.5.4 E, in order to meet CREDS 7.5.1 R, then it should do so.