SYDNEY, March 25 (Reuters) - Australia’s banking watchdog said lenders should stop using benchmark indices to estimate if borrowers can afford to repay loans and move to a more intensive system of credit checks.
The proposal comes after a year-long inquiry into misconduct in Australia’s financial sector that heard banks were underestimating borrowers’ spending and in some cases approving loans to people that could not repay them.
The Australian Prudential Regulation Authority (APRA) said from July 2020 banks would need to verify expenses rather than rely on a household expenditure index, which estimates people’s expenses based on their level of income and national statistics.
“Expense benchmarks must not be used as a substitute for (a bank) making reasonable enquiries of a borrower’s expenses,” the regulator said in a discussion paper on Monday.
The ARPA called for submissions to its proposals by June 28.
The use of more intensive credit checks has previously raised concerns of a credit squeeze.
Executives of Australia’s four largest lenders have told the powerful inquiry, or the Royal Commission, that they are trying to reduce their reliance on expenditure indices.
In November, Commonwealth Bank of Australia, the country’s largest lender, said it would cut its reliance on the statistical measure for loan applications to 50 percent, from 75 percent - the highest among the Big Four.
Westpac Banking Corp was earlier this year sued by customers who alleged the bank had given them loans they could not afford.
The Australian Banking Association did not immediately reply to an e-mail seeking comment. (Reporting by Paulina Duran; Editing by Himani Sarkar)