NAB probed over default interest charges

Federal Liberal MP Craig Kelly yesterday exposed a damaging and potentially explosive new issue for the National Australia Bank during Phil Chronican's maiden appearance before the house economics committee.

The coalition backbencher grilled the NAB and ANZ bosses over their respective approaches to managing business borrowers that encounter problems servicing their loans.

ANZ chief Shayne Elliott told the committee's morning hearing on Wednesday that his bank's standard practice was to impose penalty interest of around 2 per cent when a business borrower missed loan repayments after 90 days.

Elliott explained that loan staff were given some discretion to lower the penalty interest, but that the additional 2 per cent was usually necessary to cover the additional regulatory capital cost of carrying a loan that became impaired.

In the afternoon hearing Kelly fired the same questions at Chronican who revealed that NAB's default interest on business borrowers who fell behind on repayments was more than double the ANZ penalty.

Chronican said the bank levied an additional default interest penalty of 4.5 percent to struggling borrowers.

That disclosure triggered a stream of questions from Kelly who tried to get Chronican and his chief financial officer Gary Lennon to explain why their bank charged so much more than their cross-town rival.

The NAB duo gave different descriptions of precisely when borrowers were deemed to fall into default and began incurring the penalty interest.

When asked why NAB charged much larger default interest than ANZ, Chronican conceded that he did not know.

"I can't answer that," he told the parliamentary hearing.

Chronican also conceded that penalty interest could undermine a troubled borrower's capacity to repay.

"I appreciate that in some circumstances there is a perverse effect," he said.

"If we see a path for a customer to get back to being a performing customer and the only thing getting in the way is the default interest then clearly that is something we are prepared to take off the table to get them back."

Chronican later revealed that he was conducting a wide-ranging review of how the bank managed its impaired commercial loans.

Apparently, the review is in its early stages but Chronican promised Kelly and the committee the penalty interest issue would be examined.

"As part of that I would actually like to review the both the role and level of default interest," he told the committee.

"It's certainly something that has caught my attention that is worthy of a review."