Treat loan as total loss if EMI overdue 6 months: Central Bank

The Central Bank of the UAE has revised the basis of classification of loans and their provisions in order to depict “a truly realistic financial position of banks and other financial institutions” in the country, according to notice published on its website.

With regards to personal loans, auto loans and credit card loans, the Central Bank has mandated the country’s banks to treat the loan as total loss in case the instalment is in arrears for 180 days or more and take 100 per cent provisioning on the outstanding loan balance.

It has asked banks to make a provision of 25 per cent of total loan balance where instalments are due for 90 or more days (but less than 120 days) and 50 per cent provisioning if instalments are due for 120 or more days (but less than 180 days).

The Central Bank has also mandated banks to classify all their loans into one of the following five categories:

1. Normal loans (bearing normal financial risk),
2. Watch-list loans (potentially problematic debt requiring more than normal attention but no provision allocation),
3. Sub-standard loans (loans on which principal repayment is in arrears beyond 90 days). In such cases, a provision of 25 per cent of total loan balance is required.
4. Doubtful loans (debt with doubtful recovery, when the financial position of the customer isn’t sound and securities are insufficient). In such cases, a provision of 50 per cent of total loan balance is required.
5. Loss loans (total loss 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 total loan balance is required.

Banks “must provide,” whenever requested by the Central Bank, “convincing reasons for not classifying a particular loan and consequently not setting aside the necessary provisions”, the circular stated. “Such reasons should be convincing to the Central Bank,” the circular explicitly states.

According to the circular, and contradictory to prior cases, all accrued interest should be certified to a special account rather than being certified to “profit and loss” account.

The special account should be opened within the bank’s records under the name “interest in suspense account” and not to “profit and loss” account for the concerned loan, the circular said.

In addition to the specific provisions, banks “should make general provisions for unclassified loans and advances equal to 1.5 per cent of the risk weighted assets as per Basel-2 and such provisions must be built over four years,” according to data provided.

Federal and local government loans and loans of companies guaranteed by federal and local governments will be exempted from this general provision requirement, the circular stated.

All banks and financial institutions operating within the UAE “are required to make provisions (specific and general) and deduct them from the profit and loss account at the end of each quarter and not delay them till the end of the financial year”, the circular said.

Banks are “also required to make appropriate provisions for any off-balance sheet items which are doubtful and will certainly become liabilities.”

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