STOCK Central Bank of the UAE  CBUAE
Central Bank of the UAE in Abu Dhabi Image Credit: Courtesy Central Bank of the UAE

Dubai: The Central Bank of UAE is fully committed to the economic recovery and support measures will continue as long as they are required, Khaled Mohamed Balama, the Governor told bank CEOs.

Liquidity in the banking system and banks’ capital buffers remained adequate. The Governor informed that the regulator will continue to closely supervise banks’ asset quality and the adequacy of provisioning.

“Our assessment, confirmed by recent economic data, affirms the UAE economy’s gradual recovery,” said Balama. “As we enter the next phase of the post-COVID-19 recovery, there will be less need for extraordinary relief measures. We expect that banks will do their part in supporting our economic recovery and ensure the continued flow of funds to creditworthy retail and corporate borrowers.”

The Governor held a meeting with CEOs of select national and foreign banks operating in the UAE on Tuesday

(September 21), in the presence of Abdulaziz Al-Ghurair, Chairman of UAE Banks Federation. The discussion focused on the CBUAE’s assessment of financial stability in the UAE, and the CBUAE’s plans regarding the gradual withdrawal of its extraordinary support measures.

Gradual withdrawal

In view of the gradual increase in economic activity, the Central Bank is starting a gradual withdrawal of its Targeted Economic Support Scheme (TESS) to avoid restricting credit supply and economic growth. The participants at the meeting agreed that the TESS programme had been effective in meeting its objective of mitigating the adverse effects of the pandemic on the UAE economy.

Fifteen per cent of the UAE banks’ loan portfolio had benefitted from the TESS deferral programme.

The CBUAE also confirmed, that in the short term, it will leave unchanged the temporarily lowered reserve requirements for banks, and the level of the loan-to-value ratio applicable to mortgage loans for first-time home-buyers. It has already announced that the loan deferral component of the TESS programme will expire by the end of the 2021 - but the CBUAE’s zero cost lending facility may be used to grant new loans until mid-2022.

The CBUAE announced previously that its regulatory relief measures that allowed banks to maintain lower capital and liquidity buffers will expire by the end of 2021. However, the regulator is looking at extending these measures for a limited period to facilitate a smooth economic recovery.

The UAE’s TESS programme
The Central Bank had announced a Dh256 billion economic stimulus following the COVID-19 outbreak. This included a liquidity relief tool of Dh50 billion offered through banks to eligible customers who wish to apply for a loan deferment.

Those customers impacted by the effects of the pandemic are not required to pay their respective bank any instalments, consisting of principal and/or interest/profit, for the agreed deferment period. However, any interest/profit accrued during the deferment period on the principal amount will be paid by the customer at a later date, to be agreed upon with their respective bank.

Banks should not charge any interest/profit on the deferred interest/profit amounts, as per the conditions set by the CBUAE.

TESS scheme was implemented by banks under the close monitoring of the central bank and by mid-May 2020, most leading bank had fully utilised the facility.

Components of CBUAE bank support schemes
The CBUAE has been proactive in making liquidity available to the banking system through a range of measures such as zero cost funding, low cost funding and relaxed regulatory capital limits and liquidity rules. A total of Dh256 billion stimulus announced by the CBUAE includes a liquidity relief tool of Dh50 billion offered through banks to eligible customers who wish to apply for a loan deferment, Dh50 billion capital buffer relief, Dh95 billion liquidity buffer relief, and reduction by half the reserve requirements on demand deposits for all banks from 14 per cent to 7 per cent, adding Dh61 billion in liquidity support.

In addition, in early August 2020, the Central Bank also announced liquidity support to banks by relaxing the existing thresholds of two prudential ratios: the Net Stable Funding Ratio (NSFR) and the Advances to Stable Resources Ratio (ASRR) by temporarily relaxing the requirements for improving the structural liquidity position of banks. These measures were aimed at enhancing the capacity of the banking sector to support the economy.