Large exposures are those funded and unfunded outstandings and committed unused limits (less provisions, cash collaterals, bank guarantees and Federal Government guarantee) which a bank allows to a single borrower or his group which in total equal to or exceed 10% of the bank’s capital base. Any exposure beyond this percentage must be incurred in accordance with these regulations and guidelines. Suitable adjustments are allowed for exempted exposures as described in Para 2.11 and for computation of CCF in respect of contingent exposures.

Large exposure limits refer to the level of maximum exposure which a bank may allow to a single borrower or his group. These limits are specified in the Table contained in Article (2) of Circular 32/2013.

In accordance with Basel framework, exposure values are derived for individual risk categories such as banking book on balance sheet non-derivative assets, banking book “traditional” off-balance sheet commitments (applying CCF), positions in the trading books (excluding options), options in the trading book, and counter-party credit risk from derivatives, securities financingtransactions, and long settlement transactions across both banking and trading books.

A single borrower shall mean any single natural or juridical person.

A group or related borrowers shall mean:

- two or more natural or juridical persons who unless shown otherwise, constitute a single risk because one of them, directly or indirectly, has control over the other or others, or can exercise a controlling influence over the other or others in making financial and operating decisions;

or

- two or more natural or juridical persons between whom there is no relationship of control but who are to be regarded as constituting a single risk because they are so interrelated that, if one of them were to experience financial problems, the other or all of the others would be likely to encounter repayment difficulties such as failing to honour an obligation in a timely manner or in full.

The Central Bank reserves the right to determine individual exposures as connected.

Control or controlling influence shall mean the relationship between a parent company and a subsidiary, where the parent holds a minimum of 50% of the subsidiary’s share capital or has control over it via, for example, the composition of the board of directors, or via a similar relationship between any natural or juridical person or company.

A Government Related Entity (GRE) that is profitable and can service its debt obligations from its own resources/ operations, without need for any implicit or explicit government support and holds a rating of not less than BBB- (or equivalent) from one of the top three rating agencies can be treated as a single obligor or "stand-alone entity" for the purpose of large exposure limits.

In the context of these regulations, a principal shareholder shall mean any natural or juridical person, single or related as defined in section 1.3 above, holding 5% or more of a bank’s voting share capital.

The capital base of a bank is the same as that used for capital adequacy purposes, as defined in the Central Bank’s Circular No 27/2009 and calculated in accordance with Basel II.

Unfunded exposures may be adjusted for CCF in accordance with Basel II (Refer to Annexure B-3 for details).

If a bank holds 20% to 50% share capital of another institution, it is classified as ‘affiliate’ and if it holds 50% or more, it is classified as ‘subsidiary’. However, if the parent company has majority control over the voting power of the board of that company, it should also be classified as a subsidiary.

Exposures to Federal Government and their non-commercial or commercial entities which are fully guaranteed by the Federal Government are exempt from large exposure limits. Similarly, deals transacted by a bank on behalf of the Federal Government are also exempt. However such exposures are required to be reported in BRF 77.

Aggregate funded and unfunded exposures to UAE Local Governments and their non- commercial entities are not permitted to exceed 100% of a bank’s capital base. Within this upper limit, there is no individual cap for exposures to Local Governments however there is an upper limit of 25% for exposure to eachnon-commercial entity in the exposure group.

The commercial entities of Federal Government which are not fully guaranteed and entities owned by UAE Local Governments are subject to aggregate exposure limit of 100% and individual limit of 25% of a bank’s capital base. Stand-alone GREs that meet the definition contained in Article 2 of Circular 32/2013 (see note 4 to the Table of Maximum Large Exposure Limits) are however excluded from this group and exposures to them will be considered under (2.4) below.

In the case where a borrower or group of related borrowers belongs to the private sector or it is an entity with Government ownership of less than 50% (but not controlled by them- refer to para 1.4 above) or meets the definition of “stand-alone” GRE, an individual limit of 25% will be applicable. No aggregate limit has been specified for this category.

The Central Bank deems it undesirable that a bank lends heavily to its shareholders. Therefore, funded and unfunded exposures to a shareholder who owns 5% or more of a bank’s capital (and his related entities) shall not exceed 20% individually and 50% in aggregate.

Where a principal shareholder (for natural persons, not governments) is also a member of a bank’s board of directors, or a similar designated body, such exposures will be considered within the above aggregate exposure limits.

1. 2.6.1 Interbank exposures within UAE with original tenure of 1 year or less are exempt from individual and aggregate limits.
    
2. 2.6.2 Interbank exposures with original maturity period of 1 year or more are not allowed to exceed 30% of bank’s capital base.
    
3. 2.6.3 Exposures to banks operating outside the UAE, irrespective of their maturity are not allowed to exceed 30% of the bank’s capital base.

Whenever a bank incurs an exposure to its own parent company or to other subsidiaries of its parent, particular concerns arise. Although the management of exposures should be carried out in a fully autonomous manner according to the principles of sound banking management and without regard to any considerations other than those principles, it cannot be excluded that a certain influence on credit decisions may be exercised by persons directly or indirectly holding a qualifying participation in such a bank. As a consequence thereof, this influence may be used to the detriment of the sound and prudent management of that bank. Therefore, the Central Bank has decided to set the individual limit for an exposure at 10% in such case and to fix an aggregate limit for all such exposures at 25% of a bank’s capital base.

1. 2.8.1 A bank is not allowed to incur a funded or unfunded exposure to a member of its board of directors, or of a similar designated body, which exceeds 5% of its capital base. All such exposures, taken together must not exceed 25 % of the capital base.
2. 2.8.2 Where a member of a bank's board of directors, or of a similar designated body, is part of a group of related borrowers, total exposures to him must be included under the group. Similarly, the group's exposures must be taken into consideration when calculating the member's exposures which are not allowed to exceed 5% of a bank's capital base. Where such member is also a principal shareholder, the rules set out in Para 2.5 will apply.
3. 2.8.3 Exposures must be measured on a gross basis. However collaterals mentioned in para 1.1 are allowed to be deducted for arriving at the net exposure.
4. 2.8.4 Where a bank incurs an exposure for the purpose of real estate financing, fully registered mortgages are required.
5. 2.8.5 Exposures shall only be incurred on a commercial basis and on market terms. Moreover, the fact that the borrower is a member of the board of directors or of a similar designated body must in no way influence the bank's credit assessment and decision.
6. 2.8.5 A bank must ensure full recovery of all exposures to members of its board of directors or of a similar designated body.
7. 2.8.6 Branches of foreign banks operating in the UAE are not allowed to incur an exposure to their board members who are working abroad.
8. 2.8.7 In case a bank is obliged to book interest due from an exposure to a member of its board of directors, or of a similar designated body, in a suspense account and/or to make a bad debt provision and/or to write off an exposure, either partly or fully, the following rules shall apply:
    
   1. In case of UAE incorporated banks, the board of directors must obtain the approval of the bank's general assembly, in the presence of the bank's external auditors, and a copy of the meeting's minutes shall be filed with the Central Bank without delay.
   2. In case of branches of foreign banks operating in the U.A.E., the approval of the head office must be obtained and a copy thereof shall be filed with the Central Bank without delay.
   3. The member concerned shall not participate in the decision of the board of directors, or of a similar designated body.
   4. Banks are prohibited from granting any new facilities to a member of its board of directors, or to a member of a similar designated body, after the procedures, mentioned under (a) and (b) above, have been engaged.

Employees are defined as staff members of all levels, including executive managers. Banks are prohibited from incurring exposures to their employees other than in the form of personal loans, as defined in the Central Bank's Regulations No.29/2011. Branches of foreign banks operating in the UAE are not allowed to incur an exposure to their staff who are not working with their UAE branches.

Individually the exposures are limited to 20 months’ salary with an aggregate limit of 3% of the bank’s capital base. Housing loans extended to staff members in accordance with Central Bank Regulations and bank’s housing loan policy duly approved by their board of directors, are excluded from these limits.

In order to avoid any conflict of interest between a bank and its statutory auditors, regular consultants and lawyers, the Central Bank instructs banks not to incur any exposure to such parties. In this context, a 'regular' consultant or lawyer means any person or firm who is employed on a regular basis either under a 'retainer agreement' for a specified period or under a more general 'understanding' according to which the bank would make use of the services offered by such persons or firms for most of its needs or cases.

The following exposures are exempted from the application of Article (2) of the Circular No 32/2013 and from the individual and aggregate limits fixed in sections 2.2 to 2.9 of the Guidelines:

1. 2.11.1 Asset items constituting direct or indirect claims on/ or guaranteed by the UAE Federal government including its non-commercial public sector entities;
2. 2.11.2 Asset items constituting claims on/ or guaranteed by eligible multilateral development institutions and their affiliates as per Appendix 8 of the BASEL II Implementation Guidelines vide Circular No 27/2009.
3. 2.11.3 Asset items secured by collateral in the form of securities issued by the entities mentioned in 2.11.1 or 2.11.2 above;
4. 2.11.4 Investments made in marketable securities such as bonds/ Sukuks issued by Emirates Governments or GREs, rated not less than AA- (or equivalent) by one of the top three rating agencies, held to meet Central Bank’s liquidity requirements or held in the trading book and the intention is not to hold such bonds/ sukuks till maturity;
5. 2.11.5 Exposures secured by proper lien over deposits placed with the lending bank or its parent company or its subsidiary, under the condition that the lien can be legally enforced;
6. 2.11.6 Any other asset or security which has been specifically exempted by Central Bank from the purview of large exposure requirement.

Exposures, in either the banking or trading books, that will be in the scope of the large exposures framework can be categorized and should be measured as follows:

1. 2.12.1 Banking book on balance sheet non-derivative assets, where the exposure measure is typically determined by accounting standards;
2. 2.12.2 Banking book “traditional” off-balance sheet commitments where the exposure measure is the product of the notional amount of the commitment and the credit conversion factor (CCF) applied (refer to Annexure B-3 for additional details);
3. 2.12.3 Positions in the trading book (excluding options) where the exposure measure is based on the mark-to-market approach of the risk-based capital requirements;
4. 2.12.4 Options in the trading book where the exposure measure is based on a mark-to-market approach with a jump-to-default assumption; and
5. 2.12.5 Counterparty credit risk from derivatives, securities financing transactions, and long settlement transactions across both banking and trading books, where the counterparty credit exposure measure is determined by one of the methods of the counterparty credit risk framework.

Banks may refer to Basel standards/ Basel Team in the Central Bank for further clarification on specific issues.

Banks have to comply with the limits set above at all times, that is, not only on the reporting dates but continuously throughout each reporting period.

The Central Bank considers that the granting of credit is, generally, the core area of banking business and, therefore, the board of directors or a similar designated body and the management of banks operating in the UAE are responsible for their bank's credit policy.

Consequently, the Central Bank directs banks to formulate general credit policy instructions aimed at ensuring a prudent lending structure. Each bank's board of directors, or a similar designated body, has to approve and to implement these instructions in a way that allows for proper monitoring of all exposures.

Moreover, the Central Bank requires that a proper credit evaluation with relevant documentation will be undertaken prior to granting any credit facility.

With regard to the specific risk arising from exposures to individual countries, banks are requested to apply an extremely prudent policy when fixing country limits. The Central Bank recommends thatbanks should refer to internationally renowned credit rating agencies.

The complete loss of a large exposure may represent a considerable burden on any lending bank's capital base. The Central Bank, therefore, has stipulated that large exposures may only be granted on the responsibility of the entire board of directors of the bank, necessitating a unanimous resolution on the part of all of its members or of the members of a similar designated body.

The resolution may be passed at a meeting or in writing on a circulation basis, provided that adoption is made on unanimous acceptance.

Any such resolution has to be passed prior to the lending and a copy of it must be placed in the customer's file. Where a bank has incurred a large exposure without the required prior resolution of all members, this does not impair the legal effectiveness of the transaction. However, the Central Bank reserves the right to take appropriate action in accordance with Union Law No. (10) of 1980 and related regulations of the Central Bank based thereon.

Any existing exposure, becoming a large exposure by an increase of credit facilities, also requires a unanimous resolution of all members. In the event that an existing exposure becomes a large exposure through a reduction of the capital base, the Central Bank directs that the board of directors of the bank deliberates thereon. The board of directors must appropriately document its awareness and subsequent decisions concerning remedial action.

Under very special circumstances only, banks may deviate from the general principle of a unanimous resolution. Any such exemption must be documented properly. The Central Bank, in the course of its examinations, will verify each such case.

A bank shall 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. In order to avoid any conflict of interest banks are requested to be very prudent when incurring exposures to members of their board of directors, or of a similar designated body.

A proper assessment of a borrower's credit-worthiness serves to protect both the bank and its depositors and creditors.

It should be beyond question that lending business is only conducted with the necessary prudence customary in banking; that is, before granting a loan, the bank must be convinced that the prospective borrower is credit-worthy.

The Central Bank, therefore, advises all banks operating in the U.A.E. not only to examine the credit-worthiness of their customers in detail before granting any loan, but also to ensure a proper follow-up regarding the financial situation of each customer throughout the whole business relationship.

Banks have to make sure that they can detect any deterioration in their customers' financial situation with minimal delay. For this purpose, they are expected to review their loan books on a regular basis and ask their customers for up-dated information.

Banks must insist that major borrowers 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.

Regarding corporate customers required to keep accounts, banks should obtain regular audited annual financial statements and ensure that they are kept informed of any major changes in the customer's business environment or other variables of such customers occurring throughout the year.

In the case of loans to group enterprises, banks must obtain the individual financial statements of the borrowing group enterprise as well as the consolidated statements of the group itself.

In cases where the head office of a foreign bank or a fellow branch abroad decides on loans to be granted by its UAE branch to borrowers with activities in the UAE, the Central Bank insists that full documentation be made available to the bank's UAE branch.

With regard to borrowers who are not obliged to prepare financial statements, banks must obtain statements of assets and liabilities, land register excerpts, property tax and/or income tax assessment notices and confirmation of salary, where applicable. The question as to what documents the credit-worthiness assessment is to be based on may be decided on a case by case basis.

Banks may, in exceptional cases only, refrain from requesting a complete disclosure of a customer's financial situation where the requirement to disclose would be clearly unjustified due to the type and level of security provided; for example, where the security provided covers the repayment of the loan, including interest, at all times, at the following minimum values or after the following minimum adjustments:
 

* The market value must be determined by an independent expert and it should not exceed 10 times the yearly obtainable rent.

Other securities than mentioned above, especially unquoted securities, are not considered appropriate by the Central Bank. Banks are free to be more prudent in fixing higher markdowns particularly when the market is facing national or international financial problems. However banks should ensure that they hold adequate collaterals in respect of large exposure cases.

The waiver of the disclosure of financial situation may also be justified in the light of the credit-worthiness of guarantors. In this case, the bank must be informed about the financial situation of the guarantors according to the same principles as in the case of borrowers. Moreover, only such persons may be acceptable as guarantors who, in addition to the borrower, have assumed a legal obligation for a particular loan. All persons or enterprises already considered as a single borrower (within a group of related borrowers) are, however, exempted from qualifying as acceptable guarantors for this purpose.

The Central Bank emphasizes that, in the case of unsecured loans, the financial situation of a borrower be always disclosed irrespective of his credit-worthiness.

B-1 Special Banking Return Forms (BRFs 39, 76-87)
B-2 Explanatory Notes to Special Banking Return Forms
B-3 Credit Conversion Factors (CCFs) under Basel Guidelines

EXPLANATORY NOTES TO SPECIAL BANKING RETURN FORMS (BRFs) FOR LARGE EXPOSURES
(Annexure to Circular No 32/2013)

General Instructions for Completing Special Banking Return Forms for Large Exposures

1. Banks must refer to Circular No 32/2013 along with Guidelines to Monitoring of Large Exposures and Explanatory Notes to BRFs in order to ensure correct submission of Special Banking Return Forms on Large Exposures.
2. The Special BRFs form a part of BRF system and should be uploaded accordingly. BRF 39 is monthly report and BRFs 76 to 87 are quarterly reports which must be submitted along with monthly and quarterly batches as instructed through BRF Platform.
3. Except for those exposures secured by cash collaterals, bank guarantees/ stand-by LCs and guarantee from the Federal Government, all other exposures are required to be reported on gross basis.
4. BRFs specified hereunder are in the summary form, listing entity/ group exposures and aggregate exposures. Banks however must maintain full details of such exposures including approvals of various types of facilities to group/ relatedentities, collaterals held, status of the accounts, variations and reductions in the exposures, CCF calculations, etc. which will be reviewed by the Central Bank Examiners from time to time.
5. All large exposures are required to be reported on consolidated basis (including foreign branches and all financial subsidiaries domestic or international) as per Basel II capital framework. Lending to the same entity by group members that are consolidated, should be reported together and calculated as a percentage of the consolidated capital base. Foreign banks however need not report exposures taken by their head offices or overseas branches.

BRF- 39 Large Exposures at 10% / 15% of the Bank's Capital

A large exposure is defined as those funded and unfunded outstandings and unused committed limits (less provisions, cash collaterals, bank guarantees and Federal Government guarantee) to a single borrower or his group which in total is equal to or exceeds 10% of the bank’s capital base or AED 750 Mln whichever is lower in case of resident borrowers. For Non-Resident borrowers, the above exposure amount has been fixed at 5% of capital base or AED 500 Million whichever is lower for reporting purposes.

In case of group accounts, banks must report the name of the group along with names of 5 largest borrowing entities within the group. Exposures within the banking Group are not to be reported in this form.

Unfunded exposure should include committed unused limits of the borrower with adjustments for Credit Conversion Factor (CCF) in accordance with Annexure B-3.

BRF- 76 Aggregate Large Exposure Summary Sheet

This report lists summary of all large exposures specified in the Article (2) of the Circular on Table of Maximum Large Exposure Limits. The amounts are derived from BRFs 77 to 87 in order to monitor the aggregate exposures under individual categories.

CREDIT CONVERSION FACTORS (CCF) UNDER BASEL GUIDELINES
(Annexure to Circular No 32/2013)

In accordance with standardized approach under Basel II, banks may apply CCF percentages for off-balance sheet items determining large exposure limits. Since this is only a summarized list, banks may refer to Basel documents for additional information/ clarification.

1. Credit Conversion Factor of 100%

• All direct credit substitutes, including general guarantees of indebtedness and all guarantee type instruments, such as standby letters of credit and acceptances, backing the financial obligations of other parties.
• Credit derivatives such as credit default swaps where the bank provides credit protection.
• Sale and repurchase agreements and asset sales with recourse, where the credit risk remains with the bank.
• Forward asset purchases, forward deposits and commitments for the unpaid portion of partly-paid shares and securities which represent commitments with certain draw-downs.

2. Credit Conversion Factor of 50%

• Transaction-related contingent items e.g. performance bonds, bid bonds warranties and standby letters of credit related to particular transactions.
• Underwriting commitments under note issuance and revolving underwriting facilities.
• Other commitments -Not unconditionally cancellable with an original maturity exceeding one year.

3. Credit Conversion Factor of 20%

• Other commitments not unconditionally cancellable with an original maturity of one year or less.
• Short-term self-liquidating trade-related contingent items e.g. documentary credits collateralised by underlying shipments.

4. Credit Conversion Factor of 0%

• Any commitment that is unconditionally cancelable.
• Any items of doubt may be referred to Basel Team at the Central Bank for their clarification/ decision.