HSBC is putting many small business owners on notice that they have two months to find a new lender after conducting an internal review.
One 14-year customer of the bank being forced to close his account said the bank had an "obligation to service the community" and not just use them to make profits.
"HSBC has been conducting a review of all its businesses since May 2011, to meet its goal of streamlining the business and improving the return on capital. As part of this, the bank is reviewing its portfolio of small business customers in the UAE," the bank said.
The bank stressed that it would not stop lending to small businesses, to which it has allocated almost US$500 million during the past three years.
The tightening of lending criteria comes as local lenders, including Emirates Islamic Bank, RAKBank and Doha Bank, target small and medium-sized enterprises (SMEs), which are supported by policy initiatives to drive growth of the sector most closely linked to job creation.
HSBC said it was assigning higher priority to businesses that operate overseas "or intend to in the near future". It was also assigning dedicated relationship managers to assist customers, but also to meet "increasingly rigorous compliance and risk standards".
HSBC has recently closed UAE accounts belonging to Syrian, Iranian and Sudanese nationals because of the increasing difficulty of meeting compliance standards.
The bank paid $1.9 billion in penalties to US authorities last year after a critical report highlighting years of lax anti-money laundering controls. HSBC has apologised for its past errors and says it has made compliance a key plank of its strategy ever since.
HSBC's sudden tightening of lending rules comes as banks aggressively target small businesses for lending growth.
Banks have piled into lending to a section of the economy that is underserved and faces less regulatory uncertainty than retail lending or financing for large government-related entities, both of which were the subject of regulatory drives during the past three years.
Small-business lending, by contrast, has been supported by recent policy initiatives.
The FNC passed a law on Tuesday which compels federal authorities and ministries to set aside 10 per cent of their procurement budgets for small businesses.
The measure would give banks more comfort in lending to small businesses, said Giyas Gokkent, the chief economist at National Bank of Abu Dhabi. But the support from the Government was encouraging banks to funnel their capital towards small businesses at a time when lending to other segments of the economy was becoming more difficult, he added.
Trade credit - which includes SME lending, but also lending to larger companies - rose by just 0.7 per cent to Dh106.2bn last year, according to data from the Central Bank.
Doha Bank said last month it would earmark $1.5bn for lending to SMEs and corporate clients, while Emirates NBD launched a new social network for entrepreneurs.
The UAE Banks Federation, meanwhile, has launched a working group intended to help increase access to credit for small businesses in the Emirates.