The UAE Central Bank has asked local lenders with exposure to the Saad and Gosaibi Group legal action to increase their loan loss provisions from 50 per cent up to 80 per cent.
According to a Central Bank circular, banks must make the provisions for Saad Group and Ahmad Hamad al Gosaibi & Brothers by the end of the year.
"The Central Bank's role ultimately is to protect the lenders." Sulieman al Mazroie, chairman of the Banker's Business Group in Dubai.
In the circular, issued by Sultan Nasser al-Suweidi, Governor of the Central Bank, said: "All these provisions must be by the end of 2010 and the Central Bank's approval of the banks' annual audited results are conditional on the allocation of those provisions."
Last year, the Central Bank told banks to make provisions for 50 per cent of their exposure to the conglomerates by the end of the year.
The circular comes as a Kuwaiti newspaper on Sunday said the Saad Group had offered Kuwaiti lenders 20 cents for each dollar it owes them. According to al Qabas, the Kuwaiti daily, some lenders said they would accept 30 cents on the dollar and others sought 40 per cent.
"The Central Bank is considering the worse case scenario," said Mohamed Ali Yassin, chief investment officer at CAPM Investments in Abu Dhabi.
The two conglomerates, which are involved in a series of legal disputes, owe an estimated $22bn worth of debt to local and international creditors.
Sulieman al Mazroie, chairman of the Banker's Business Group in Dubai, said: "The Central Bank's role ultimately is to protect the lenders."
The circular has also asked banks to maintain their 100 per cent provisions on Awal Bank, and The International Banking Corp or TIBC, units of Saad Group and al Gosaibi, which were taken over by the Bahraini central bank last year.
The difference in coverage ratios of provisioning is largely an assessment of exposure of those groups from lenders by the Central Bank, Mr al Mazroie said.