UAE regulators issue guidance on handling problem loans during coronavirus crisis

Differentiation should be made between clients facing temporary or minor issues and those severely affected

Deputy Prime Minister and Minister of Presidential Affairs, Sheikh Mansour bin Zayed, has been appointed as chairman of the Central Bank of the UAE. Ryan Carter / The National

Regulatory bodies in the UAE issued joint guidance for banks and financial institutions with instructions on how to account for potential bad loans during the Covid-19 outbreak that has affected economic activity.

The Central Bank of the UAE and the regulators of the country's two financial free zones - Abu Dhabi Global Market and the Dubai International Financial Centre - pointed to the support already provided to lenders through the central bank's Targeted Economic Support Scheme (Tess). The programme, which was boosted to Dh256 billion on Sunday, includes easing of capital buffers that banks are required to hold when extending loans to businesses, the Central Bank said in a separate statement on Sunday.

The regulators said “the flexibility embedded in the IFRS 9 framework” - a global accounting standard applied to financial instruments - should be employed when looking at clients’ ability to repay loans.

“As uncertainty reigns in economies and financial markets worldwide, the UAE government has taken significant measures to support economic stability and preserve liquidity,” said Richard Teng, chief executive of the Financial Services Regulatory Authority at ADGM.

The joint guidance is being issued to lenders “to provide direction for the financial impact management of our firms amidst current economic turmoil”, Mr Teng added.

It says banks should place those unable to make payments due to business disruption into two groups.

The first involves companies that are only temporarily and mildly affected and the second includes those that are severely affected. For the first group facing temporary liquidity issues, banks should not take action in terms of reclassifying loans as problem loans during the central bank’s Tess period.

For the second, more severely affected group, companies facing a “sufficient deterioration in credit risk” should have their borrowings migrated to the second stage and classified as problem loans. However, the regulators said that loans should not be downgraded to the third stage - where they are considered impaired - during the (Tess) support period, except in exceptional circumstances “if clients’ business models are no longer sustainable”.

The number of coronavirus cases in the UAE increased to 1,505 on Saturday, while the death toll rose to 10, according to the country's health ministry. The number of people who have recovered increased to 125.