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    بوابة الاقتراحات والملاحظات لحكومة دولة الإمارات

    

CENTRAL BANK OF THE UAE


Notice : 313
Date : 20.12.1984

To : All Banks
Re.: Provision for Bad and Doubtful debts and Interest in Suspense

Dear Sirs,
It appears that the systems that banks operating in the UAE follow regarding provisions for bad and doubtful debts and interest in suspense vary considerably.

The following guidelines aim at bringing about more uniformity:-

Provision for bad and doubtful debts.
Banks should establish and maintain a regular procedure of classifying their loans and advances in order to identify accounts in which adverse credit features have been observed. Any account which, according to banking norms, is not recoverable in full should be classified.


Banks may maintain such a procedure, consisting, in principle, of the following classifications:-
a) Unclassified loans and advances, which includes :
  • normal risks, i.e. those accounts relating to which sufficiently favourable credit and financial information is available to assure repayment as agreed, and also
  • accounts which show some weaknesses in the borrower?s financial condition or credit worthiness justifying more than normal attention to the credit but not requiring any provision so far.
b) Classified loans and advances which include :
  • Sub-standard (high risk) - This category should comprise accounts which may lead to a loss, due to adverse factors (either financial, economic, political or managerial) or due to weakening of security. Normally, an account in which payment of principal or interest is in arrears beyond 180 days should qualify at least for this grading.
  • Doubtful - those accounts, the full recovery of which appears doubtful on the basis of information available, and therefore a certain amount of loss is likely (e.g. customer has a negative net worth and the bank is not protected in full by securities).
  • Loss - the category will comprise those accounts where all possible courses of action available have been taken for recovery, but little or not results have been produced.
In view of the above definitions, a bank should normally provide in full for loans classified as "loss" and for the amount of expected losses on accounts classified as "Sub-standard" and "doubtful".

It should be recognised that, in the matter of grading an account and deciding upon the extent of provision, there is no substitute for mature, judgement, based on expertise, knowledge and experience, since some of the characteristics mentioned under (b), which are generally considered as weaknesses do not necessarily have a universal application in all situations. However, a bank must be able to give sufficient relevant and sound reasons for not classifying a loan in view of the position of the account and of the situation of the borrower and for not setting aside the provision that such a position would appear to require. Such reasons should be produced to the satisfaction of the Central Bank, when requested.

Interest in Suspense :

All accrued interests should be credited to a general ledger account styled as "Interest in suspense account" (and not to Profit and Loss account).
a) Where the risk relating to an advance or loan has been identified and provision made;
b) In case of loans, where interest payment is in arrears for a period of six months (the bank suspense interest if it is in arrears even for a shorter period).
In case of overdrafts, banks should be in a position to show evidence that interest earned can be considered as real; such evidence should satisfy the Central Bank when requested for. In all other cases interest should also be kept in suspense, particularly:
i) when there is a degree of doubt about the recoverability and provision has already been made;
ii) when interest has been suspended on any other facility to the same customer (or group);
iii) when the outstandings are consistently in excess of authorised limits or when the account is in debit although there is no sanctioned facility.
The same would apply when the authorised limits are susbsequently increased/sanctioned only to cover the outstandings; in other words, at the time of review of an account, banks have increased the authorised facilities, not on merits, but only in order to show that the outstandings have come within the limits after they have been increased.

Operations in such accounts often only indicate (a) withdrawals and (b) debit entries relating to bank charges and interest on the over-draft itself or on other loans, while credits are scarce, causing the balance to show a continuous increase over a protacted period (of say 6 months or more).

Transfer of interest in suspense to Profit and Loss account

Any subsequent payment in the account may first be applied towards recovery of interest hold in suspense. As a result, the amount of interest to the extent subsequently paid/realised in cash may be taken into profit (as advised in our circular No. 278 dated 22.5.84) provided however that due and full repayment of the remaining outstanding is no longer subject to doubt.

In some exceptional cases, the same may be authorised by a special permission of the Central Bank in instances where quality has improved by additional tangible security and satisfactory repayment arrangements which are beyond doubt.

The Central Bank expects that such procedures would enable banks to show the real profits (without inflating them). This would also lead to a better risk assessment, a better credit management and a more meaningful and effective evaluation of the advances portfolio from all angles.


Yours faithfully,



ABDUL MALIK AL HAMAR
GOVERNOR





Name of Bank _____________________________________________

(Dh. In 000's) _____________________________________________

Examination as at _____________________________________

Total Loans and Advances : ________________________

Less amount refinanced : __________________________

Loans and Advances (Net) : _______________________ (A)


Classification       Interest in Suspense Shortfall in provisions {2-(3=4)}
  1 2 3 4  
Normal          
OLEM          
Sub-Standard          
Doubtful          
Loss          
Other advances not reviewed by Examiners          


( B )  
Amount of advances where interest is not charged _______________
Amount of advances where interest is taken to suspense account _______________
Other Accounts _______________
Total      ( C ) _______________
Int,. income since beginning of the year as per P/L Ledger _______________
Int. income since beginning of the year _______________
Total      ( D ) _______________


Average rate of interest = D/(A) or ( B ) or ( C ) %

Note : (A), (B) and (C) should tally with each other.

        

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