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    PRA Letter on Modifying Rule on Minimum Provisioning Requirements

    October 07, 2020

    PRA issued a letter to credit unions notifying them of its decision to publish a model direction modifying a PRA rule on minimum provisioning requirements. The letter includes the detailed PRA rule modification available to all consenting credit unions from January 02, 2021 until December 31, 2022. PRA has taken this decision due to the ongoing stress credit unions face due to the COVID-19 outbreak and the importance of a credit union’s capacity to cure bad debts prior to 12 months. The letter reiterates the messages on engagement with PRA and regulatory reporting, also confirming the supervisory focus and priorities for credit unions in this period.

    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. 

     

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

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