UAE lenders left unsure over latest rules on banking

The Central Bank's new limits on lending come into effect today. But banks are still in the dark over how to implement them.

The Central Bank capped the amount banks could lend to governments and their commercial holding companies in April. Silvia Razgova / The National

New rules come into effect today limiting how much banks can lend to companies.

But banks are uncertain about what to do if they are already in breach of the new rules.

In April, the Central Bank capped the amount banks could lend to governments and their commercial holding companies in an effort to shield them from any financial fallout from a default at a big company.

A number of major banks that have traditionally done a lot of business with their emirate's governments, including the National Bank of Abu Dhabi and Emirates NBD, said they were currently in breach of the rules and have asked the Central Bank to ease implementation of its circular.

But the regulator has not issued any public declarations clarifying its approach to the rules. Nor has it granted a reprieve to banks in private, said two sources, who did not wish to be identified, at lenders in breach of the rules.

"There has not been any formal waiver or extension of the circular's deadline yet," said one of the sources.

NBAD said last week it had asked the Central Bank for an extension to today's deadline "to give time for detailed and technical discussions to take place".

An Emirates NBD spokesman declined to comment.

Some analysts said the most likely concession to banks would be an extension of the start date of the regulations.

"We expect the start of implementation to be extended by another six months to [the end of the first quarter next year]," analysts from Bank of America Merrill Lynch wrote in a research note released Thursday.

But with no concessions granted to banks so far, it was unclear whether the Central Bank would attempt to strictly enforce the new rules, said Naveed Ahmed, a financial analyst at Global Investment House.

"The banks are working for a waiver or some sort of delay to some other date to bring their finances into accordance, but that hasn't happened," he said. "What happens now? There's not enough time for the banks to take any action."

Bank chief executives including Emirates NBD's Rick Pudner and Abu Dhabi Islamic Bank's Tirad Mahmoud attended a quarterly meeting at the Central Bank on Tuesday. Also attending were Abdul Aziz Al Ghurair, the chief executive of Mashreq and the president of the Emirates Banks Association, which is leading commercial banks' lobbying efforts.

"Subjects related to banking business were discussed," the Central Bank said after the meeting. It did not disclose whether the single-borrower limits were formally discussed, although bankers said the new rules were not on the agenda. The Central Bank could not be reached for comment.

Daman Investments' managing director, Shehab Gargash, has warned over-regulation of the financial industry was in danger of choking off the UAE's recovery.

"The structurally low growth potential of the UAE banking system is being exacerbated by tougher regulations," analysts from Deutsche Bank wrote in April.

The rules, recommended by the IMF, were designed to safeguard banks from the kind of losses that occurred after Dubai World and other state-linked firms restructured their debts. Money set aside as cover for the cost of missed payments totalled Dh63 billion (US$17.15bn) in June, according to the latest data from the Central Bank.

In May last year, it introduced regulations on retail banking, in an effort to rein in the lending free-for-all that had characterised the boom years and curb excessive fees. Lenders successfully delayed implementation of the rules after extensively lobbying the Central Bank, which led to the creation of a specialised working group for retail banking reforms.