The Australian Prudential Regulation Authority (APRA) has released APS 220 Credit Risk Management which is an updated prudential standard on credit risk management requirements for authorised deposit-taking institutions (ADIs). The revised APS 220 will come into effect from 1 January 2021.

Credit risk refers to the possibility that a borrower will fail to meet their obligations to repay a loan, and is usually considered the single largest risk facing an ADI.

The updated standard addresses recommendation 1.12 from the Final Report of the Financial Services Royal Commission. As recommended by the Royal Commission, APRA has amended APS 220 to require independent valuation of collateral, for the valuation to take into account the time taken for realisation of collateral and, to the extent possible, the likelihood of external events, such as drought and flood.

The finalised prudential standard has broadened its coverage to include credit standards, consistent with ASIC’s recent update to its responsible lending guidance, and the ongoing monitoring and management of an ADI’s credit portfolio in more detail. It also incorporates enhanced board oversight of credit risk and the need for ADIs to maintain prudent credit risk practices over the entire credit life-cycle.

The revised APS 220 also provides a more consistent classification of credit exposures, by aligning recent accounting standard changes on loan provisioning requirements, as well as other guidance on credit-related matters of the Basel Committee on Banking Supervision.