Measures under the Targeted Economic Support Scheme include allowing UAE banks to temporarily defer loan repayments and extend existing facilities for corporate and retail clients.
The Central Bank of the United Arab Emirates (CBUAE) has introduced the AED 100 billion Targeted Economic Support Scheme (TESS), which came into effect on 15 March 2020. TESS consists of an AED 50 billion allocated facility from the CBUAE for collateralised loans to be provided at zero cost to all banks licensed to operate in the UAE (TESS Facility) and AED 50 billion by way of funds freed up from banks’ capital buffers (Capital Buffer Relief).
These measures are significant as they enable banks to provide temporary relief to their corporate and retail clients that are affected by the coronavirus (COVID-19) pandemic by deferring loan repayments and extending existing facilities.
The purpose of the TESS Facility is to allow banks to offer their retail and corporate clients affected by COVID-19 temporary relief from the requirement to make payments of principal and interest on existing loans. The TESS Facility cannot be used to assist clients that are already in default on their existing loans, are not resident in the UAE, are unaffected by the pandemic, or are government entities.
The TESS Facility allows banks to draw down on funds provided by the CBUAE at no cost. These funds can then be substituted for the payments the banks would be expecting from their clients, allowing the banks to defer the expected payments from their clients to a later date.
The latest maturity date of the loans to be provided under the TESS Facility is currently 31 December 2020 (extended from 15 September 2020); therefore, the CBUAE has directed banks to actively offer their corporate and retail clients affected by COVID-19 the opportunity to defer payments of principal and interest on existing loans until this date.
Banks are required to provide eligible collateral to the CBUAE that is equal in value to the amount of the loan to be provided and has a maturity that is equal to or greater than the maturity of the loan to be provided. Eligible collateral includes certificates of deposit issued by the CBUAE, as well as collateral that is accepted under the existing CBUAE’s Interim Margin Lending Facility and Collateralised Murabaha Facility lending programmes.
Banks are also required to provide evidence to the CBUAE that the funds from the TESS Facility are being used to defer payments of principal and interest on outstanding loans for their clients. The TESS requires that specific submissions confirming the use of funds be submitted to the CBUAE by the head of the relevant bank’s compliance department. Failure to provide the required evidence will result in the bank being liable to pay a default rate of 10% per annum on the amount that it has borrowed.
The individual limit for each bank is proportional to the relevant bank’s share of total lending to private sector corporates, small and medium enterprises, and individuals in the UAE as of 31 December 2019. As of 16 May 2020, the CBUAE announced that more than 17 banks have utilised more than 50% of their allocation of the funds available to them under the TESS Facility, with 10 already having used 100% of their allocation.
Banks are not permitted to charge their clients any additional fees or increase the interest rate payable by their clients in connection with relief that is provided under the TESS. The CBUAE recommends that banks provide their clients with (1) additional financing at reduced rates, (2) working capital relief, (3) new credit lines, (4) rescheduling of loans, and (5) reduced fees and commissions.
As of 16 May 2020, AED 38.5 billion of the available AED 50 billion (approximately 77%) has been utilised by the banks in the UAE.
All banks are permitted to tap into a maximum of 60% of their capital conservation buffers, and, additionally, banks designated as domestically systemically important by the CBUAE will be able to use 100% of their additional capital buffers for systemic importance.
According to CBUAE, the value of the Capital Buffer Relief is AED 50 billion and will be available to banks until 31 December 2021 (extended from 15 September 2020). The purpose of providing Capital Buffer Relief is to provide the banks with extra liquidity, which they can use to offer their clients extensions of existing facilities.
CBUAE cut the reserve requirements for banks by 50%, from 14% to 7%. This measure is intended to inject liquidity of about AED 61 billion, which can be used to support banks’ lending to the UAE economy.
Banks participating in TESS will also be able to use one-third of their current regulatory liquidity buffers. Banks will have the flexibility to maintain a minimum liquidity coverage ratio of 70% and a minimum eligible liquidity asset ratio of 7%. The total value of the release of these regulatory liquidity buffers is estimated at AED 95 billion.
The measures introduced by CBUAE give banks operating in the UAE the ability to defer payments expected from their clients that are affected by the COVID-19 pandemic. Given that approximately 77% of the TESS Facility has been utilised, it is likely that there will continue to be a number of amendments to existing commercial facilities and rescheduling of payments, as corporates are forced to operate in suboptimal conditions due to COVID-19.
Banks should bear in mind that the measures introduced by the CBUAE are intended to be temporary and are indeed limited by both value and time (e.g., AED 50 billion and 31 December 2020 in the case of the TESS Facility). As this is the case, depending on when companies are able to begin operating optimally again, once these limits have been hit the CBUAE may be faced with the choice of either (1) increasing the value and/or time limits related to the measures that it has introduced or (2) requiring banks to utilise the mechanisms provided for in Federal Law 9 of 2016 to restructure nonperforming loans that were previously benefitting from the TESS.
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