Banks will be required to declare bad loans earlier and book provisions for them sooner, under new Central Bank rules aimed at bringing the banking sector into line with international standards.
Lenders will be required to set aside provisions for non-performing loans (NPLs) each quarter rather than waiting until the end of the financial year, according to rules posted on the regulator's website yesterday.
The rules also cut in half the time required to classify a loan as non-performing to 90 days.
The move is the latest step in the Central Bank's attempt to align its regulations with international best practice. The limits fall in line with recommendations set out by Basel II.
"This review will also serve as a catalyst in depicting a truly realistic financial position of banks and other financial institutions," said the Central Bank.
Banks' profits were hit by a rising number of NPLs linked to a downturn in the property market and job losses. Banks increased provisions for NPLs by 41 per cent to Dh37.2 billion (US$10.12bn) in the 12 months to the end of August.
Many banks already meet the new requirements. But the new rules are likely to be welcomed by investors as it will mean banks must be more vigorous with their handling and disclosure of problem loans.
Analysts say First Gulf Bank (FGB), Emirates NBD and Abu Dhabi Islamic Bank (ADIB) are among lenders that may be affected by the changes. FGB reports a loan as non-performing only when it is more than 180 days overdue.
"When you have an increase in transparency and standardisation, inevitably some banks may be caught on the wrong side of that," said Raj Madha, a banking analyst with Rasmala Investment Bank in Dubai.
"Investors have had some doubts about how vigorously some banks are reporting NPLs."
Making all lenders classify and provision for NPLs under the same standard would provide more clarity and enable easier comparability of performance, he said.
"All banks and other financial institutions are required to make provisions, specific or 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," said the Central Bank.
Under the new regulations, banks will be required to classify loans they extend under one of five categories, with three of those categories requiring the booking of provisions.
Loans that may lead to the bank incurring some losses are classified as "sub-standard loans". In this category are loans on which payment has been in arrears for more than 90 days. The Central Bank requires banks to take a provision of 25 per cent of the total loan balance.
"Doubtful loans" are those loans on which full recovery seems unlikely. In such instances, banks are required to book a provision of 50 per cent of the total balance. Finally, "loss loans" are those on which banks have exhausted all attempts to recover the debt. A provision of 100 per cent of the total amount is needed in such a circumstance.
In addition, banks make general provisions for unclassified loans and advances equivalent to 1.50 per cent of their risk-weighted assets.
No one was available to comment from either FGB, Emirates NBD or ADIB.