The Board of Directors of Central Bank of the UAE has set the rules to govern ratio requirements to which all banks must adhere to ensure their liquidity and solvency, in particular, banks must follow a prudent credit policy in order to safeguard the assets entrusted to them..
The new rules are in accordance with Part Three, Chapter Two, of Union Law No. (10) of 1980 concerning the Central Bank and the Monetary System and Organisation of Banking.
For the purpose of assessing whether a bank's credit policy, and the exposures arising there from, is deemed prudent and, more specifically, whether the risk arising from an excessive concentration of credit to a single borrower or to a group of related borrowers may endanger the solvency of a bank, the Board of Directors of Central Bank of the UAE has resolved to set rules for the monitoring of credit exposure limits of banks operating in the UAE.
30 per cent limit
Exposures to banks operating outside the UAE, irrespective of their maturity, are not allowed to exceed 30 per cent of the bank’s capital base.
The same applies to exposures of branches of foreign banks to their head offices and other branches abroad, as well as to foreign subsidiaries and affiliates of such head offices; this limit also applies to exposures of UAE incorporated banks vis-a-vis their foreign subsidiaries and affiliates.
Conflict of interest, stand-alone, arms-length
All banks must have strict policies in place (approved by their board of directors) to cover potential conflict of interest where loans are issued to staff members on a "stand- alone" commercial basis.
Loans for business purposes should be separately classified as commercial loans and approved on an ‘arms- length’ basis.
Banks that have exposures that are out of line with the new limits as per the table at the date on which they come into force, must, at a minimum, improve such exposures at the rate of 20 per cent per annum, i.e. full compliance with the limits must be achieved in 5 years.
The limits contained in this table are subject to review, in line with international regulatory development.
All large exposures must be reported to the Central Bank on a consolidated quarterly basis ( including subsidiaries and affiliates where applicable), as per the attached special return forms (Special Banking Return Form Large Exposures), not later than the end of the month following the end of each calendar quarter.
Banks must report any large exposure which existed at any time during that quarter.
The Central Bank may in the future exempt certain exposures from the reporting requirements.
Report in writing
If, in an exceptional case, exposures exceed the limits fixed in Section 2 at any time during any quarter, these must be reported to the Central Bank in writing without delay, indicating the reasons for the non-compliance.
The Central Bank may allow banks a limited period of time during which they must comply again with the limits.
Banks are required to take appropriate measures to comply with the limits as soon as possible and in any event not later than the end of the quarter following the over-limit situation.
Exposures to members of a bank's board of directors, or of a similar designated body, must be reported to the Central Bank on a quarterly basis as per the attached special return forms (Special Banking Return Form - Exposures to Board Members) not later than the end of the month following the end of each calendar quarter. The explanatory notes attached to the return forms must be followed.
The board of directors, or a similar designated body of banks operating in the UAE is responsible for its bank's credit policy and, therefore, must review, for information all facilities above a certain limit and approve all facilities above a higher limit.
They must also ensure a fair structure and a balanced composition of their bank's credit portfolio.
General credit policy
Banks must formulate general credit policy instructions aimed at implementing a prudent lending structure, taking into account the risk arising from excessive exposures vis-a-vis governments, public sector entities, particular economic sectors etc, within the UAE and abroad. Banks should exercise utmost prudence with regard to inter-bank exposures.
The credit policy instructions must address both on-and off-balance sheet items.
A proper credit evaluation including appropriate documentation must be undertaken prior to granting any credit facility.
The credit assessment has to be in line with each bank's general credit policy and must be based on an in-depth analysis of each customer's credit worthiness, reputation as a borrower and any information on loan-repayment history.
Notwithstanding the legal effectiveness of a transaction, a bank may only incur a large exposure on the basis of a unanimous resolution on the part of all members of its board of directors, or of a similar designated body, provided that the bank's general credit policy procedures have been followed.
The resolution has to be passed prior to the lending and a copy of it must be placed on the customer's file.
A bank may only incur an exposure to a member of its board of directors, or of a similar designated body, on the basis of a unanimous resolution on the part of all members, except the member concerned, provided that the bank's general credit policy instructions have been followed.
The resolution has to be passed prior to the lending and a copy of it must be placed on the member's file.
Ask major borrowers to disclose reliable evidence
Banks are obliged to ask their major borrowers to disclose reliable evidence of their financial situation by submitting financial statements, other relevant information and signed declarations of their independence from the bank, its principal shareholders, directors and officers.
All such information has to be updated regularly.
In exceptional circumstances, banks may refrain from doing so, if the requirement to disclose would be clearly unjustified due to the type and level of security provided.
Central Bank of the UAE requires that every bank sets up sound administrative and accounting procedures and adequate internal control systems, especially for the purpose of identifying and recording all large exposures, as defined in these Regulations, and for monitoring and controlling those large exposures according to each bank's own general credit policy.
The implementation of these accounting procedures and internal control systems must be approved by each bank's board of directors, or by a similar designated body, and should be documented appropriately.
Banks not meeting the limit requirements, as defined in these Regulations, may be granted additional period for reduction of their exposures individually and/or in the aggregate, not extending beyond five years from the implementation of these Regulations.
Circular No 16/93 and its amendments shall be cancelled with effect from the date these Regulations come into force.
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