UAE Central Bank issues new loan rules

ABU DHABI — The UAE Central Bank has introduced fresh guidelines on loan provisioning with immediate effect, under which lenders will make provisions at the end of each quarter rather than delaying until the end of the financial year.

By Haseeb Haider

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Published: Mon 15 Nov 2010, 11:11 PM

Last updated: Mon 6 Apr 2015, 11:26 AM

According to the Circular No.28 of 2010 issued by Khalil Mohammed Sharif Foulathi, the Chairman of the Board of Directors of the UAE Central Bank, “banks, finance and investment companies shall establish and maintain regular procedures for classifying loans and advances in a way that would allow them to monitor and identify weakness.”

For this purpose, loans have been classified into five categories, according to their conditions.

Watch-list loans are those loans which show some weaknesses in the borrowers’ financial condition and credit-worthiness requiring more than normal attention only.

Sub-standards loans are those credits, which may lead to incurring of some loss due to adverse factors, and hinders the payments. Normally this category includes loan and advances in which payment of principal is in arrears beyond 90 days. In such cases, a provision of 25 per cent of the loan is required.

In the doubtful loans category, a provision of 50 per cent is required according to the new regulations. Loss loans are those credits where the bank has exhausted all courses of action available but failed to recover anything. In such cases, a provision of 100 per cent of loan balance is required, the Central Bank said.

Personal loans

The Central Bank has directed to make a provision of 25 per cent of loan balance in cases where installments are in arrears for 90 days. In cases of 120-day arrears, a provision of 50 per cent of the loan balance will be made and where installment in arrears exceed 180 days, a 100 per cent provision is required.

Eric J. Milne, a partner of banking and finance at law firm Jones Day in Dubai said the new regulations are in line with international standards in comparison to the previous ones.

“The new regulation will introduce a quarterly, transparent and accurate valuation of a bank’s loans book which will be beneficial to shareholders,” he said.

To a question on whether this regulation will make the life of borrowers difficult, Milne said “if anything this may assist borrowers’ as there is now a quarterly requirement to assess their borrowings and to open an active dialogue in the event servicing those loans may be proving difficult. Tackling stressed situation earlier rather than later is likely to result in a better outcome for both debtors and creditors.”

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