Banks in the UAE will suspend legal action against cash-strapped small and medium sized enterprises struggling to repay debt for up to three months.
The UAE Banks Federation (UBF), a professional body representing 49 banks in the UAE, on Monday announced the new mechanism or "modus operandi" that in effect would act as "a mini insolvency law" aimed preventing a surge in defaults.
AbdulAziz Al Ghurair, Chairman of the UBF, said the first-of-its-kind initiative in the UAE would be applicable to companies that have borrowed Dh50 million or more from several banks and are showing signs of financial stress that often lead to inability in servicing their debts.
"This mini-insolvency law is meant to help customers with time and space as long as they are genuine," he said.
Speaking to the media, Al Ghurair, who is also the CEO of Mashreqbank, said the banks body is lobbying the government to "expedite" a new insolvency law that has been eagerly awaited by the business community for several years.
He said lending to SMEs, who account for more than 60 per cent of the gross domestic product of the nation, is a top priority for all UAE banks.
"Current concerns about the sustainability of SME and corporate lending and its effect on the economy as a whole has led the UBF to take a more pro-active role in bringing together banks and borrowers to minimise incidents of total default," he said.
"We believe the new modus operandi will help restore market stability, stem credit losses and maintain the reputation of the UAE as a place to do business," said Al Ghurair.
The crucial move by the UBF comes at a time when there is an unprecedented surge in number of the bank defaults and incidents of expatriate businessmen fleeing the country in the absence of legislation on debt restructuring and bankruptcy.
Over the past year, UAE banks have been hit by a spate of defaults, especially from wholesale traders of foodstuffs and oil in the wake of a sharp drop prices of commodities.
The total bad loan exposure faced by UAE banks was recently estimated at between Dh5 and Dh6 billion. Al Ghurair said the latest estimate on banks defaults would be made available soon.
"We will lend to SMEs, who account for about three per cent of banks' total lending, as long as the economy is in good shape and the customer is in good shape. If the economy slows and the customer slows the bank will also slow its lending," Al Ghurair said, pointing out that the initiative has the backing of the Central Bank, as well as the unanimous agreement of banks.
The UBF modus operandi process is expected to take a maximum 15 days from the first meeting of lenders to the conclusion of agreement with the borrower. No bank will resort to legal action during this period, he said.
The UBF is also discussing the impact of a likely move to decriminalise bounced cheques which is aimed at helping defaulting businesses to stay put and restructure their loans instead of ending up in jail or fleeing from the country. Cheques are still a common form of payment in the UAE and often held as a security deposit against personal and business loans.
Al Ghurair said the UBF would play a coordinating role as remedial credit coordinator, which will be initially to receive notifications from banks of corporate customers who have 'skipped' or who are concerned that multi-banked corporate clients are showing signs of financial stress that could lead to restructuring.
The UBF will also be the contact point for corporate borrowers for assistance in restructuring their debts where more than one bank is involved, he said.
Banking circles said the plan would give breathing space to SMEs, which contribute around 60 per cent of UAE's gross domestic product.
The mechanism will also be applicable for borrowers of total exposure of less than Dh50 million whereby they can approach the lending banks directly. The initiative calls for SMEs committee recommendations among banks to share information and to cap the maximum exposure of unsecured per customer as well as the number or value of unsecured loans to a single customer.
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