The Central Bank in the UAE has launched its extensive stimulus support scheme of Dh100 billion that will greatly benefit the real estate sector and various other business sectors. This special package has been unveiled for assisting corporates and retail customers overcome financial hurdles owing to the coronavirus epidemic. Named as the Targeted Economic Support Scheme, this package will comprise of Dh50 billion from funds of the UAE Central Bank via collateralized loans at zero costs for all banks functioning in the United Arab Emirates. It will also have Dh50 billion of funding that will be freed up from capital buffers of banking institutions.
The WHO (World Health Organization) has issued a declaration, calling the Covid-19 virus as a pandemic, these new measures will enable greater help for corporate and retail customers alike in these tough market conditions and will be effective immediately as per reports. Capitalization is sufficient in the banking system across the UAE and voluntary capital buffers are maintained by banks along with the minimum prudential needs. Dipping into these buffers is not taken into account for working out the total size of the economic support scheme as well.
Key aspects to know about the scheme
Guidelines will be released by the UAE Central Bank relating to margin calls, asking banks to always request extra collateral within a reasonable time frame, prior to liquidation of the stocks that are pledged, in the event of a downfall in the market. This will lower excessive volatility in the market while offering greater flexibility to investors. The CBUAE will also be directing banks to swiftly open SME customer accounts within two days in case there is proper documentation and the risks are acceptable on the basis of CTF and anti-money laundering regulations.
Banks will have to fairly treat all customers in the current scenario and the scheme aims at enabling temporary relief to customers from payment of interest and principal components of outstanding loans across the private sector and retail borrowers as well. This relief will be made possible for up to 6 months when the banks use this funding likewise. Several corporates and retail customers have become vulnerable to shorter cash flow risks owing to the Covid-19 pandemic outbreak and the scheme helps in tackling the current situation by offering zero cost funding to banks and temporary relief for customers. Foreign currency reserves have touched more than Dh405 billion as of the 10th of March, 2020. These reserves are deemed sufficient for protecting the stability of the national currency while accomplishing the objectives of the Central Bank with regard to ensuring financial and monetary stability throughout the country. Banks will have permission to use up to 60% of capital conservation reserves and banks which have garnered the systemic importance designation from the UAE Central Bank, can use up to 100% of additional capital buffers as well.
Vital points under the scheme
The scheme has lowered the amount of capital that is required to be held by banks for loans given to SMEs. It has lowered this threshold to 15-25% and the LTV (loan to value) ratio will be increased in relation to mortgage loans for first-time home buyers by 5 percentage points. This will naturally increase housing affordability without scaling up any additional risks. First-time home buyers will benefit since they will have to furnish lower capital upfront when buying their properties in the UAE. This scheme will greatly benefit the real estate sector and may lead to higher sales volumes in the long run.
The Central Bank will also be revising the existing time threshold which sets the maximum exposure for banks to the real estate sector. When overall exposure touches 20% of the loan portfolio of the banks, then they will be able to scale this up to 30% although more capital will have to be held for this purpose as per the UAE Central Bank. This move will benefit real estate developers as well in the current scenario. The UAE Central Bank will be adopting new regulations with an objective towards lowering fees that have been incurred by merchants when customers pay up via credit or debit cards. New regulations will also be issued for limiting the fees charged by banks to SME customers while also stipulating that banks cannot charge bigger minimum account balance to the tune of Dh10,000.
This scheme will be operational from 15th March, 2020 and will be valid for 6 months. Fees charged for payment services provided to banks in the UAE via payment and settlement mechanisms have also been completely waived by the UAE Central Bank.