The Central Bank of Ireland has recently published guidelines for Credit Unions on loan provisioning. These should bring a greater level of clarity and assist Credit Unions in ensuring that the methodology for calculating the loan provision complies with the requirements of FRS 102.
So what do Credit Unions need to do?
We have set out the following key points that you need to consider:
- Existing provisioning policy – Credit Unions are required by the 2016 Regulations to have such a policy. Now is the time to review the policy that is currently there and revise and update it to meet the current set of guidelines.
- Calculating the provision – The provision must be calculated in line with the policy. Credit Unions should determine the methodology for calculating the provision first and then apply it in practice. Credit Unions need to ensure that there is appropriate segregation of duties between those calculating the provision requirement and those reviewing the outcome of the calculation
- Assessing impairment – A loan will require a provision if one or more impairment triggers have occurred and these triggers are likely to result in less than the full value of the loan being repaid. The guidelines set out examples of impairment triggers and requires that Credit Unions incorporate their own triggers into the provisioning policy.
- Reporting the provision – Loan book reviews should be conducted at a minimum on a quarterly basis. The results of the review should be communicated to the Board through the CEO. Any changes in the provision should be booked quarterly and the overall movement in the provision should be explained and understood in the context of the Loan Book itself
- Loan write offs – it has always been the case that loans greater than 53 weeks in arrears should be written off if there has been no capital repayment. The Central Bank now expects that this exercise is undertaken quarterly in line with the loan book reviews and not left until year end
- Default Loans – The Central Bank has now defined what it means by a loan in default. It is any loan greater than 180 days in arrears and these loans should have a provision of 100% applied to the net loan balance. Credit Unions will need to consider carefully and document the “reasons why” if they opt not to provide fully for such loans. Some Credit Unions will be using software to assist in the calculation of the provision. Where this is the case, Credit Unions should consult with their software providers to clarify that the software has been updated accordingly.
- Collateral – Many Credit Unions have commenced issuing Mortgages and until now the value of the attaching collateral was not considered in calculating the provision requirement. The Central Bank has outlined that where Credit Unions hold a first legal charge, they are permitted to consider the value of the collateral. However, caution should be exercised, as valuations are required to be kept up to date and if such a loan defaults the valuation is required to be obtained at the time of default.
How can RBK help?
We can assist you in the following ways:
- Review your existing provisioning policy and provide guidance on how to comply with the current guidelines
- Review the results of the most recent loan book review and provide advice on whether it meets the requirements of the policy
- Complete a loan book review in accordance with the revised and updated policy and communicate the results and findings to you
- Assist in determining appropriate impairment triggers for inclusion in the policy
Please do not hesitate to contact Michelle O'Donoghue on (090) 6480600 should you wish to discuss the above in further detail.