UAE central bank rolls out $27bln stimulus to help banks, economy

The Central Bank of the UAE on Saturday said local banks are well-capitalised and have significant voluntary capital buffers in order to support the local economy impacted by coronavirus.

Wile announcing a Dh100 billion stimulus package to ensure ample liquidity in the local banking sector and support the economy, the central bank said the Targeted Economic Support Scheme consists of Dh50 billion from central bank funds through collateralised loans at zero cost to all banks operating in the UAE and Dh50 billion funds freed up from banks' capital buffers.

Given that the World Health Organisation has declared Covid-19 as a global pandemic, these measures are aimed at helping retail and corporate customers in tough times and will enter into force with immediate effect.

All banks will be allowed to tap into a maximum of 60 per cent of the capital conservation buffer and, additionally, banks designated as systemically important by the central bank will be able to use 100 per cent of their additional capital buffer for systemic importance.

As part of the stimulus package, it also reduced the amount of capital banks have to hold for their loans to SMEs by 15 to 25 per cent and will increase the loan-to-value ratios applicable to mortgage loans for first-time home buyers by five percentage points.

"This will contribute to the affordability of housing without unduly increasing inherent risks. First-time buyers will benefit from being required to put up less of their own capital when making the first real estate purchase," it said.

The central bank will also issue guidelines on margin calls, requesting banks to always request additional collateral within a reasonable time, before liquidating the pledged stocks in a situation of market downfall. This would reduce excessive market volatility and provide investors with increased flexibility to act in their best interest, it said in a statement issued on Saturday.

Central banks worldwide are supporting through interest rate cuts and providing stimulus package to fight the slowdown due to the Covid-19 pandemic.

"Banks are expected to retain sound lending standards and are required to treat all their customers fairly. The purpose of the targeted scheme is to facilitate provision of temporary relief from the payments of principal and interest on outstanding loans for all affected private sector companies and retail customers in the UAE," the UAE central bank said in a statement on Saturday.

It advised banks to use the funding to grant temporary relief to private sector corporate customers and retail clients for a period of up to six months.

"Many retail and corporate customers have become exposed to the risk of temporary shortfall of their cash flows due the outbreak of Covid-19, and the scheme is addressing the current situation by providing both a relief to customers and a zero cost funding to banks," the apex bank said.

Analysts praised the central bank's initiative and proactive approach to deal with the crisis at hand. Atik Munshi, senior partner at Crowe, said Covid-19 has hit business sectors across the globe and the UAE is no exception.

"Sectors like retail, hospitality, aviation, tourism, etc, have taken a brunt of this pandemic. The UAE is one of the few states who have acted proactively to provide a booster to the economy by way of granting banking relief through its central bank. Economists and governments are grappling themselves to quantify the cost of disruption from Covid-19 though a relief of Dh100 billion will come as a harbinger in times of turmoil," said Munshi.

"Such proactive steps by the central bank are the need of the hour and are expected to help the economy sail through these stormy economic times. Ease of opening bank accounts to SMEs will improve sentiment of the business community," he added.

Anish Mehta, chairman of the Institute of Chartered Accountants of India (ICAI) - Dubai Chapter, hailed the initiative, saying it will facilitate many key sectors including banks, real estate, SMEs, retail and corporate customers to re-strategise their business and support each other.

"All these industries are the backbone of the UAE economy and helping them means energising the entire country. This will make doing business easier and provide much-needed stability when people are pre-occupied with concerns about the pandemic and also carry out their operations normally," he said, adding that the central bank has worked on minute details and waiving of various charges and non-maintenance of high minimum account balance are such examples of that.

Imran Farooq, CEO of Samana Group, said the UAE through the central bank has extended region's massive and unprecedented support of Dh100 billion economic stimulus package, which has immediately boosted the morale and trust of the people and companies in UAE.

"We thank the UAE central bank for the right decision at the right time. We feel that we are in safe hands and we do not need to worry about Covid-19. The UAE stands tall among the most humanitarian countries," Farooq said.

Anurag Chaturvedi, CEO of Chartered House, said coronavirus is proving to be a significant shock to economies around the world.

"Banks need to be in a position to continue financing households and corporates experiencing temporary difficulties. The stimulus aims to support banks in serving the economy and addressing operational challenges in the short term and having additional stimulas will enable them to continue financing," he added.