Small ADIs take chances on loan serviceability

There were "clearly examples of practice that were less than prudent" by smaller banks and mutual ADIs in a recent study by the Australian Prudential Regulation Authority, the regulator's chair, Wayne Byres, told an industry forum yesterday.

Byres surveyed some recent work, including some hypothetical lending proposals prepared by APRA, for the Customer Owned Banking Association.

He said: "Of major concern were a few ADIs who opted to make their credit assessment based on a lower level of living expenses than that declared by the borrower.

"That is obviously a practice that should not continue, and ADIs should be making reasonable inquiries about a borrower's living expenses."

He said that "in fact, best practice (and intuition) would be to apply minimum living expense assumptions that increase with borrower incomes; this was a practice adopted by only a minority of ADIs in our survey."

"The surprising result from our review was the very wide range of loan amounts that, hypothetically, were offered to borrowers.

"It was not uncommon to find the most generous ADI was prepared to lend in the order of 50 per cent more than the most conservative ADI."

Byres concluded his remarks by pointing out that "when it comes to capital, we will have more to say shortly.

"But my message today is that we will respond to all of the FSI's recommendations as soon as we can, bearing in mind the need for a coordinated approach that factors in international work."