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Note 15: Advances

2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m

By type

 
17,753 17,698 Kiwibank loans and advances 17,795 16,689
9,260 9,178 Student loans 9,197 8,982
1,766 1,517 Other advances 1,591 2,563
28,779 28,393 Total advances 28,583 28,234

Further information on the management of risks associated with these financial assets is provided in note 26.

2017 Forecast Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m

Kiwibank Loans and Advances

 

By maturity

 
1,243 1,239 Expected to be repaid within one year 1,319 1,267
16,510 16,459 Expected to be outstanding for more than one year 16,476 15,422
17,753 17,698 Total Kiwibank Loans and Advances 17,795 16,689

Impairment of Kiwibank Loans and Advances

 
Opening balance 53 53
Impairment losses recognised 10 21
Amounts written off as uncollectible (7) (11)
Impairment losses reversed (16) (10)
Closing balance 40 53
Collective impairment allowance 34 44
Individual impairment allowance 6 9
Impairment of Kiwibank Loans and Advances 40 53

Ageing of Kiwibank Loans Past Due But Not Impaired

 
Less than six months 101 108
Between six months and one year 7
Total Kiwibank loans past due but not impaired 108 108

Kiwibank loans are measured at amortised cost. The fair value of Kiwibank loans is $17,824 million (2016: $16,804 million). This fair value is based on a discounted cash flow model with reference to market interest rates, prepayment rates and estimated credit losses.

The maximum loss due to default on Kiwibank mortgages is the carrying value reported in the statement of financial position. Collateral is obtained to mitigate any risk of loss, which in the case of Kiwibank mortgages are primarily in the form of properties. The fair value of the collateral provided is sufficient to ensure that the entire amount owing over the life of the mortgage will be recovered and there is reasonable assurance that collection efforts will result in payment of the amounts owed in a timely manner.

2017 Forecast Note Actual
Budget
2016
$m
Budget
2017
$m
30 June
2017
$m
30 June
2016
$m

Student Loans

 
15,709 15,665 Nominal value 15,735 15,340
(6,449) (6,487) Write-down on initial recognition and impairment (6,538) (6,358)
9,260 9,178 Total student loans 9,197 8,982
Gross carrying value 10,991 10,838
Impairment of student loans (1,794) (1,856)
Total student loans 9,197 8,982

By maturity

 
Expected to be repaid within one year 1,273 1,209
Expected to be outstanding for more than one year 7,924 7,773
Total student loans 9,197 8,982

Movement During the Year

 
Opening balance 8,982 8,864
Net new lending (excluding fees) 1,475 1,512
New lending - establishment fee 10 10
Initial write-down to fair value (662) (659)
Repayments made during the year (1,272) (1,208)
Interest unwind 5 602 603
Movement in impairment during the year 62 (140)
Closing balance student loans 9,197 8,982

Impairment of Student Loans

 
Opening balance 1,856 1,716
Impairment losses recognised during the year (30) 175
Amounts written off as uncollectible (32) (35)
Closing balance 1,794 1,856

Student loans are recognised initially by writing the amount lent down to fair value plus transaction costs. Subsequently student loans are measured at amortised cost using the effective interest method, including the annual impairment figure.

Fair value on initial recognition of student loans is determined by projecting forward estimated repayments from borrowers under the scheme and discounting them back at an appropriate discount rate.

The student loan scheme is intended to provide a cost effective means of enabling a wide range of people to access tertiary education, gaining knowledge and skills that enhance the economic and social wellbeing of New Zealand. No interest on loans to New Zealand residents is charged and there are no repayments required from those with very low incomes. Loans of those who die or become bankrupt are written off.

The student loan valuation model reflects current student loan policy and macroeconomic assumptions. As such, the carrying value is sensitive to changes in a number of underlying assumptions, including future income levels, repayment behaviour and macroeconomic factors such as inflation and the discount rates used to determine the effective interest rate on new borrowers.

Actual
30 June
2017
30 June
2016
Significant assumptions behind the carrying value are:  
Effective interest rate - weighted average 6.8% 6.9%
Interest rate applied to loans for overseas borrowers 3.9%-5.5% 3.6%-5.5%
Consumer Price Index 0.2%-2.0% 0.4%-2.0%
Future salary inflation 1.5%-3.0% 1.1%-3.0%

In contrast to 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 2017. It is determined by discounting the cash flows at an appropriate discount rate.

Actual
30 June
2017
$m
30 June
2016
$m
Fair value of the student loan portfolio 9,812 9,794
Impact on fair value of a 1% increase in discount rate (535) (558)
Impact on fair value of a 1% decrease in discount rate 601 630

The fair value differs from the carrying value by $615 million 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 2017. At that date the fair value was calculated on a discount rate (including expenses) of 5.7% (2016: 5.4%) whereas a weighted average effective interest rate of 6.8% (2016: 6.9%) 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. This can be found at: http://www.educationcounts.govt.nz/publications/series/student_loan_scheme_annual_reports

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