Allowance for Credit Losses in Australia 2025: Guide for Lenders & Borrowers

As Australia’s lending environment evolves, one concept is quietly transforming the way banks, lenders, and even some businesses manage risk: the allowance for credit losses. With the introduction of new accounting standards, ongoing economic volatility, and increased regulatory focus in 2025, understanding this allowance isn’t just an exercise for accountants—it’s essential for anyone with a stake in loans, receivables, or financial statements.

What Is Allowance for Credit Losses?

The allowance for credit losses is a reserve that lenders and some businesses set aside to cover potential losses from loans or receivables that might not be repaid. Essentially, it’s a financial buffer against bad debts. Under the updated AASB 9 (Australian Accounting Standards Board), this allowance is no longer just about losses that have already happened—it’s about estimating future credit risks and being prepared for them.

• Expected Credit Loss (ECL) Model: Australian institutions now use forward-looking models to project losses, rather than relying solely on historical defaults.

• Who’s Affected? Banks, credit unions, fintech lenders, and any business that extends credit or records trade receivables.

• Why It Matters: The size of this allowance directly impacts profits, lending decisions, and even dividend payments for listed companies.

2025 Policy Updates and Economic Trends

2025 has brought several key changes to the credit loss landscape in Australia:

• APRA’s Enhanced Guidance: The Australian Prudential Regulation Authority (APRA) now requires more granular disclosures from banks on how they calculate expected credit losses, particularly in sectors facing economic stress, such as commercial property and small business lending.

• Economic Headwinds: With interest rates stabilising at higher-than-expected levels and household debt near record highs, banks are increasing their allowances to reflect a greater risk of defaults—especially in mortgage and SME lending.

• Climate Risk Integration: Lenders are now factoring in climate-related risks, such as exposure to flood-prone regions, when calculating credit loss allowances. The AASB has issued new guidance on incorporating environmental risk data into forward-looking credit models.

For example, in 2025, several major Australian banks boosted their credit loss provisions after a sharp rise in business insolvencies, particularly in the retail and construction sectors. This adjustment was mirrored by tighter lending criteria, impacting both business owners and homebuyers.

How Does This Affect Borrowers and Investors?

The allowance for credit losses isn’t just an abstract accounting line item—it has real-world effects:

• Tighter Lending Standards: When a lender increases its allowance, it’s usually a sign that it sees more risk ahead. This can translate to stricter loan approvals, higher interest rates, or reduced access to credit for consumers and businesses.

• Financial Reporting: Investors are watching credit loss allowances closely, especially for banks and listed lenders. A sudden jump in provisions can signal concern about economic trends, potentially affecting share prices and dividends.

• SMEs and Trade Credit: Many Australian businesses extend credit to their customers. The move to expected loss models means more robust credit checks and, in some cases, higher pricing or reduced payment terms for customers in higher-risk industries.

Consider a manufacturer in Victoria that sells on 30-day terms. With insolvencies rising in the construction sector, the business may need to increase its allowance for credit losses, directly reducing its reported profits—but also ensuring it’s not caught off-guard if a customer goes bust.

Strategies for Navigating the 2025 Credit Landscape

Both lenders and borrowers can take proactive steps in this new environment:

• For Lenders and Businesses: Invest in better credit risk analytics, regularly update credit policies, and integrate macroeconomic and climate data into allowance calculations.

• For Borrowers: Maintain strong financial records, improve cash flow management, and be prepared for more rigorous scrutiny when applying for loans or trade credit.

• For Investors: Scrutinise banks’ and lenders’ financial statements, focusing on allowance movements and management commentary on credit quality.

Ultimately, the allowance for credit losses is more than a technical requirement—it’s a signal of how resilient Australia’s financial system is to shocks. Staying informed and agile in response to these changes is crucial for business owners, investors, and anyone seeking finance in 2025.