PRA Letter on Modifying Rule on Minimum Provisioning Requirements

The modification of PRA rule on minimum provisioning requirements is identical in effect to a modification available to all credit unions, which expires on January 01, 2021. Where credit unions consent to the modification, minimum provisioning requirements for bad debt will be reduced to the rates set out below:

• 20% of the net liability to the credit union of borrowers where the amount is more than three months in arrears
• 40% of the net liability to the credit union of borrowers where the amount is more than six months in arrears
• 60% of the net liability to the credit union of borrowers where the amount is more than nine months in arrears
• 100% of the net liability to the credit union of borrowers where the amount is more than twelve months in arrears

Credit unions that have consented to the current modification must also consent to the new modification if they wish the modified rules to continue to apply to them after January 01, 2021. Credit unions can consent in advance of January 02, 2021, although the modification will not apply until that date. If taking up the modification, credit unions should be mindful of the overarching PRA requirement on provisioning and provision accordingly and appropriately. In the letter, PRA mentioned that some credit unions have changed their strategic approach to new lending and credit control amid crisis. If credit unions do make such changes, it is essential that Boards consider and accept the associated risks and the potential financial impact in the short, medium, and long term, in addition to ensuring they have focused management information that allows them to measure the success of their approach.

In the letter, PRA also emphasized on the importance of a credit union’s cure rate as an indicator. The nature of PRA provisioning requirements, whether or not a credit union consents to the modification of PRA provisioning rules, means a credit union’s capacity to cure bad debts—particularly before they reach 12 months in arrears—is a key driver in terms of financial performance. The analysis of PRA shows that credit unions that engage with members whose loans are in arrears and get them paying again before the mandatory 100% provision hits at 12 months have a much better chance of avoiding financial difficulty. 

Related Links

• Notification
• Letter (PDF)
• Direction Modifying PRA Rule (PDF)

Keywords: Europe, UK, Banking, COVID-19, Minimum Provisioning Requirement, Reporting, Credit Risk, PRA Rulebook, Credit Unions