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Note 17: Advances

Note 17: Advances
Forecast
30 June 2012 		Actual
Budget 11
$m 		Budget 12
$m 		30 June
2012
$m 		30 June
2011
$m

By type

 
7,822 8,238 Student loans 8,291 7,460
13,493 12,637 Kiwibank mortgages 12,445 11,495
1,118 1,216 Other advances 1,030 1,612
22,433 22,091 Total advances 21,766 20,567

By source

 
12,875 13,465 Core Crown 13,580 12,447
373 280 Crown entities 325 368
13,904 13,089 State-owned enterprises 12,765 12,382
(4,719) (4,743) Inter-segment eliminations (4,904) (4,630)
22,433 22,091 Total advances 21,766 20,567

Further information on the management of risks associated with these financial assets is provided in note 33.

Note 17: Advances (continued)
Forecast
30 June 2012 		Actual
Budget 11
$m 		Budget 12
$m 		30 June
2012
$m 		30 June
2011
$m

Student Loans

 
12,909 12,982 Nominal value 12,969 12,070
(5,087) (4,744) Write-down on initial recognition and impairment (4,678) (4,610)
7,822 8,238 Total student loans 8,291 7,460
Gross carrying value 9,242 8,697
Impairment of student loans (951) (1,237)
Total student loans 8,291 7,460

By maturity

 
Expected to be repaid within one year 930 787
Expected to be outstanding for more than one year 7,361 6,673
Total student loans 8,291 7,460

Movement During the Year

 
7,325 7,460 Opening balance 7,460 6,790
1,590 1,607 Amount lent in the current year 1,586 1,564
(707) (714) Less initial write-down to fair value (701) (713)
(834) (859) Repayments made during the year (877) (802)
534 537 Interest unwind 526 484
(110) 194 Impairment losses (recognised)/reversed during the year 286 125
24 13 Other movements 11 12
7,822 8,238 Closing balance student loans 8,291 7,460

Impairment of Student Loans

 
Opening balance 1,237 1,362
Impairment losses recognised during the year -  - 
Amounts written off as uncollectible -  - 
Impairment losses reversed (286) (125)
Closing balance 951 1,237

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
2012
$m 		30 June
2011
$m

Significant assumptions behind the carrying value are:

  
Effective interest rate - current year 7.4% 8.1%
Effective interest rate - weighted average 7.2% 7.1%
Interest rate applied to loans for overseas borrowers 4.6%-6.7% 6.6%-6.7%
CPI 1.8%-2.5% 2.5%-2.8%
Future salary inflation 3.2%-3.5% 3.5%-3.8%

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 2012. It is determined by discounting the cash flows at an appropriate discount rate.

Note 17: Advances (continued)
Actual
30 June
2012
$m 		30 June
2011
$m
Fair value of the student loan portfolio 8,527 7,221
Impact on fair value of a 1% increase in discount rate (396) (416)
Impact on fair value of a 1% decrease in discount rate 432 475

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 2012. At that date the fair value was calculated on a discount rate of 6.6% (2011: 7.6%) whereas a weighted average effective interest rate of 7.2% was used for the carrying value.

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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