'Modus Operandi' sets precedent for self-regulation
The UAE Banks Federation said it will stop legal action against small and medium-sized businesses for 90 days and work with them to restructure their outstanding debt. Due to a slowdown in the economy, many SMEs that belong mainly to the food and beverage and oil and gas industry, have been registering losses, resulting in bad debts for banks. This has moved the banking body, which includes 49 member banks, to announce a moratorium of 90 days before any legal action is initiated. During this time, the banks will also be looking at ways to restructure the bad debt so that troubled business will be able to begin repaying loans.
"This solution is a better solution than the immediate legal solution if the customer is genuine, because if he runs away to his home country, his business comes to standstill. It's better for the bank to protect its interest by allowing the customer to restructure his business," Abdul Aziz Al Ghurair, Chairman of UBF, told journalists.
"We want to support our customers who are going through difficult times. We want to sup- port our economy and customers, as long as they are genuine customers. We have put on the table a mini insolvency law, which will give the customer the time, space as long as he's genuine," Al Ghurair added.
"The steps would be prudent, particularly to avoid premature enforcement on quality or performing SME borrowers, which was an issue during second half of 2015, Due to a global fall in commodities prices, including oil, many banks also began curtailing lending to the SME sector.
A 90-day freeze for bank lenders gives time for a more constructive resolution of stressed SMEs with their owners, said Nitish Bhojnagarwala, assistant vice-president at Moody's Investor Services tolf media.
The UBF has divided its SME clients into two, depending on the amount of exposure with the bank. Those having loans less than Dh50 million will be viewed as small customers, while those having between Dh100 million and Dh1 billion in loans will be viewed as medium sized customer. The UBF itself will handle restructuring requests from medium- sized clients and will shape a mechanism to support them. In the case of small business, the bank with the largest amount of outstanding debt (if there is more than one bank with whom the customer has a loan) will be the lead bank that co-ordinates with the small-sized clients. This remedial action was unanimously supported by all the member banks with the support of the central bank, Al Ghurair said.
"Banks want to genuinely help the customer, and the customer has to be genuine in trying to repay the bank and help them to rebuild the business once again," he said.
The total exposure to small enterprises from the banks is 3-5 per cent of the total balance sheet of the banking system, Al Ghurair said. "The exposure to this sector is very small and in any economy, in any cycle, there always will be something like this. We want to show the world that we are proactively putting solutions on the table," he said, adding "this is a moral agreement that all banks will abide by."
The so called ' Modus Operandi' solution that the UAE Banks Federation has provided for restructuring of loans to distressed SMEs could be a precedent for self-regulation, its chief Abdul Aziz Al Ghurair said on Monday.