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Note 17:  Advances

Note 17: Advances
Forecast Actual
Original
Budget
$m 		Estimated
Actuals
$m 		30 June 2010
$m 		30 June 2009
$m

By type

 
7,658 6,874 Student loans 6,790 6,553
8,843 10,411 Kiwibank mortgages 10,419 8,492
767 682 Other advances 1,238 559
17,268 17,967 Total advances 18,447 15,604

By source

 
11,972 10,970 Core Crown 11,088 10,429
452 379 Crown entities 416 379
9,041 10,758 State-owned enterprises 11,114 8,768
(4,197) (4,140) Inter-segment eliminations (4,171) (3,972)
17,268 17,967 Total advances 18,447 15,604

Student Loans

 
11,110 11,152 Nominal value 11,145 10,259
(3,452) (4,278) Write-down on initial recognition and impairment (4,355) (3,706)
7,658 6,874 Total student loans 6,790 6,553
Gross carrying value 8,152 7,635
Impairment of student loans (1,362) (1,082)
Total student loans 6,790 6,553

By maturity

 
Expected to be repaid within one year 759 761
Expected to be outstanding for more than one year 6,031 5,792
Total student loans 6,790 6,553

Movement During the Year

 
7,131 6,553 Opening balance 6,553 6,741
1,478 1,543 Amount lent in the current year 1,525 1,350
(573) (754) Less initial write-down to fair value (728) (532)
(794) (751) Repayments made during the year (754) (710)
516 473 Interest unwind 463 465
(110) (201) (Impairment)/reversal of impairment (280) (779)
10 11 Other movements 11 18
7,658 6,874 Closing balance student loans 6,790 6,553

Impairment of Student Loans

 
Opening balance 1,082 303
Impairment losses recognised during the year 280 779
Closing balance 1,362 1,082

Student loans are recognised initially by writing the amount lent down to fair value plus transaction costs, and subsequently measured at amortised cost using the effective interest rate method, less any impairment loss. Fair value on initial recognition of student loans is determined by projecting forward expected repayments required under the scheme and discounting them back at an appropriate discount rate. The difference between the amount lent and the fair value on initial recognition is expensed on initial recognition. The subsequent measurement at amortised cost is determined using the effective interest rate calculated at initial recognition. This rate is used to spread the Crown's interest income across the life of the loan and determines the loan's carrying value at each reporting date.

Note 17: Advances (continued)
Actual
30 June 2010
$m 		30 June 2009
$m
Significant assumptions behind the carrying value are:  
Effective interest rate - current year 9.5% 9.4%
Effective interest rate - weighted average 7.0% 6.7%
Interest rate applied to loans for overseas borrowers 6.6%-6.8% 6.7%-6.8%
CPI 2.4%-3.0% 1.5%-2.5%
Future salary inflation 3.0%-3.5% 1.5%-3.5%

In contrast with the amortised cost approach described above, fair value is the amount for which the loans could be exchanged between knowledgeable, willing parties in an arm's-length transaction as at 30 June 2010. It is determined by discounting the cash flows at an appropriate discount rate.

Note 17: Advances (continued)
Actual
30 June 2010
$m 		30 June 2009
$m
Fair value of the student loan portfolio 6,366 5,464
Impact on fair value of a 1% increase in discount rate (361) (276)
Impact on fair value of a 1% decrease in discount rate 412 308

The fair value differs from the carrying value due to changes in market interest rates at reporting date. The carrying value is not adjusted for such changes as it is valued using the effective interest rate determined when the loan was initially drawn. However, the fair value was calculated on a discount rate that was current at 30 June 2010. At that date the fair value was calculated on a discount rate of 7.7% (2009: 9.2%) whereas a weighted average effective interest rate of 7.0% was used for the carrying value. Therefore, the lower fair value does not represent an impairment of the asset.

Through the everyday operations of the student loan scheme the Government is exposed to the risk that borrowers will default on their obligation to repay their loans or die before their loan is repaid. The student loan scheme does not require borrowers to provide any collateral or security to support their borrowings. As the total sum advanced is widely dispersed over a large number of borrowers, the scheme does not have any material individual concentrations of credit risk. The credit risk is reduced by collection of repayments through the tax system.

The Student Loan Scheme Annual Report contains more information on the student loan scheme.

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