Central Bank of the United Arab Emirates, after due consultation with banks operating in the United Arab Emirates, has revised the basis of Classification of Loans and their Provisions, which is in line with the International Prudential Standards. This review will also serve as a catalyst in depicting a truly realistic financial position of banks and other financial institutions.

The objective of this set of Regulations is to identify a framework suitable for evaluating the loans and advances portfolio, in line with standards adopted by Basel Committee and international best practices. The same should be applied for suspension of interest.

Banks, finance companies and investment companies shall establish and maintain regular procedures for classifying loans and advances they extend to their customers, in a way that would allow them to monitor and identify such loans and advances that manifest features of weakness. For this purpose, loans and advances should be classified within levels (1) to (5), according to their conditions and per usual banking standards, as follows:-

All accrued interest, as in the following cases, should be credited to a special account, to be opened within bank’s records (for the concerned loan) under the name “interest in suspense account” and not to ‘profit and loss account’:-

1. Where the risk relating to the loan or advance has been identified and provision made.
    
2. Where due interest is in arrears for a period beyond 90 days. (Banks may suspend interest after a shorter period, if deemed appropriate).

It should be noted that in the matter of grading an account, its classification and consequently deciding on the extent of the required provisions, there is no substitute for mature judgment, based on the expertise and knowledge, as some of the characteristics mentioned under (3), (4) and (5), which are generally considered an indication of weakness, do not necessarily apply to all cases. However, a bank must be able to give convincing reasons for not classifying a particular loan and consequently not setting aside the necessary provisions, in view of the position of the loan or advance and the creditworthiness of the borrower. Such reasons should be convincing to the Central Bank, whenever requested.

In case of overdrafts, banks should be in a position to show evidence that interest earned can be considered real; such evidence should satisfy the Central Bank when requested for. In all other cases, interest should also be kept in suspense, particularly:-

1. When there is doubt regarding payment of interest and/or it has not been paid after 90 days of due date.
    
2. When due interest on other accounts of the same customer (or group) other than overdraft account has been actually suspended.
    
3. When the outstanding is consistently in excess of the agreed upon limit or when the account is in debit although there is no sanctioned facility.

In case of bad overdraft accounts, banks are not allowed to capitalize interest, or to extend new loans to portray that the account is performing.

The pretense process may be noted when banks show that the reason for the balance increase of these accounts is due to (a) withdrawals, (b) debit entries resulting from interest on the same overdraft or other loans, where repayments are rare for a period of (6) months.

1. Where installments are in arrears for (90) days:
    

   a provision of 25% of loan balance will be made.

2. Where installments are in arrears for (120) days:
    

   a provision of 50% of loan balance will be made.

3. Where installments in arrears exceed (180) days:
    

   a provision of 100% will be required.

1. Where installments are in arrears for (90) days:
    

   a provision of 25% of loan balance will be made.

2. Where installments are in arrears for (120) days:
    

   a provision of 50% of loan balance will be made.

3. Where installments in arrears exceed (180) days, and the sale of the car is hindered for any reason:
    

   a provision of 100% will be required.

1. Where balance due is in arrears for (90) days:
    

   a provision of 25% of loan balance will be made.

2. Where balance due is in arrears for (120) days:
    

   a provision of 50% of balance will be made.

3. Where balance in arrears exceeds (180) days, and it became unfeasible to reach a settlement with the client, or that he left the country without leaving assets which cover the loan balance or part of it:
    

   a provision of 100% will be required.

In addition to the specific provisions, banks should make general provisions for unclassified loans and advances equal to 1.50%, of the risk weighted assets as per Basel – 2, such provisions must be built over 4 years. Federal government loans and loans of companies owned and/or guaranteed by federal government as well as direct loans of local governments and loans of companies guaranteed by local governments will be exempted.

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

1. Where a loan shows significant improvement, its classification may either be amended or cancelled, according to the case. And where classification has improved or the loan becomes unclassified due to improvement in borrower’s positions and his repayment became regular, then part of the provisions may be credited to the profit and loss account.
    
2. Any payment received from the borrower to repay a loan, whose interest was in suspense, may be considered part of interest in suspense. An equivalent to this amount may be credited to profit and loss account, provided that due and full repayment of the remaining outstanding is not subject to any doubt.

With regard to reduction in the value of mortgaged shares, kindly refer to adopted accounting treatment, per International Accounting Standards.

With regard to reduction in the value of investments (including real estate), kindly refer to adopted accounting treatment, per International Accounting Standards.

All banks and other financial institutions are required to make provisions (specific and general) required for this regulation 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.

Banking Supervision and Examination Department should issue a manual to clarify how banks and other financial institutions should comply with terms of these regulations including submission of reports to the Central Bank.

Banking Supervision and Examination Department should also issue another manual for its examiners to explain the regulatory procedures relevant to these regulations.

As such, Circular No. 313 dated 20/12/1984 is hereby cancelled with effect from the date of issuance of these regulations.

This regulation shall be communicated to the concerned parties for implementation thereof, and shall come into effect from date of its issue.

This regulation shall be published in the official gazette in both Arabic and English.

Yours faithfully,