New bank provision rules soon

The Central Bank is to soon issue a circular on new provisioning norms, which, apart from tightening specific provisioning, will require banks to make a compulsory general provisioning in the range of 1.25 per cent to two per cent of the loan book.

The total size of the UAE banks' loan book has already crossed Dh1 trillion as of November end, 2009. The cut-off time for loans to be classified as sub-standard will be reduced from the current 180 days to 90 days.

These steps are expected to have a marked impact on the volume of provisioning banks will be required to make in the future, especially in the immediate quarter succeeding the law announcement, bankers said.

"We have already been alerted by our external auditors, after their meeting with the Central Bank recently, that the cut-off time for loans to be classified as sub-standard will be soon reduced from the current 180 days to 90 days," bankers told Emirates Business.

Existing regulations (as per Notice 313/1984) require banks to classify loans as substandard only when payment of principal or interest is in arrear beyond 180 days. "The reduction of this period by three months to 90 days means the banks will begin making specific provisions three months earlier," they explained.

But the impact of this will be felt only in the first quarter that follows the new regulations. Though there are strong indications that the new regulations will be made effective for the 2009 financials onwards, most bankers expect them to be in place from the first quarter of 2010 only.

While the 1984 circular does not quantify the provisioning to be made against the classified loans – substandard, doubtful and loss – the new regulation specifies that while substandard attracts provisioning of 25 per cent of the balance amount, 50 per cent needs to be allocated against doubtful and 100 per cent in the case of loss.

The new regulation has also described how banks will have to make provisioning against credit card, personal loans and auto loans in the case of they turning 'classified'. Many banks already follow the 90-day norm for specific provisioning. Many banks also allocate funds for general provisioning even in the absence of a mandatory requirement.

The UAE banks are already saddled with bad loans, especially from troubled Saudi groups – Saad and Al Gosaibi. The Central Bank had directed banks to allocate provisions against these exposures in parts, starting from 2009.

The Central Bank said the number of lending banks to the two groups and their related banks is 20, with 13 national and seven foreign bank branches operating in the UAE, and their funded and unfunded exposures amount to $2.9 billion (Dh10.65bn). "Although these provisions are considered substantial, the expected profits of all banks in the UAE, after deducting such provisions, may reach Dh20bn at the end of 2009 compared to Dh26.8bn in 2008," it said in November.

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