Bank of Uganda suspends payment of arrears as a precondition for loan restructuring; warns banks against excessive and or hidden restructuring fees

Bank of Uganda has today issued guidelines to all supervised financial institutions, to operationalize the credit relief and loan restructuring measures announced in the Monetary Policy Statement of April 6, 2020.

In a 14^th April circular to all CEOs of Commercial Banks, Credit Institutions and Microfinance Deposits Taking Institutions, collectively known as Supervised Financial Institutions (SFIs), Dr. Adam Mugume, the Ag. Deputy Governor said that the guidelines shall be in effect for 12 months effective April 1st, 2020.

The guidelines are applicable only to credit facilities not classified as loss as at 31st March 2020 and shall not be applicable to any credit facility granted after 1st April 2020.

In the guidelines, the central bank said that a maximum of two (2) restructurings is allowed for any credit facility, irrespective of the number of times it has been restructured in the past and that any extra restructurings shall be strictly on application to the central bank.

“Payment of- arrears as a precondition for restructuring is temporarily suspended during this 12 month period. However, SFIs are allowed to capitalize and recover these unpaid arrears less any associated penal interest or fees as part of the credit facility restructuring,” he said and added that banks should only charge legal fees and stamp duty as an added expense.

“The SFI must ensure, and will be required to demonstrate, that the associated legal fees are reasonable, if charged,” he warned, adding: “Consumer protection remains a regulatory priority and SFIs shall ensure full disclosure and act in the interest of customers, with no hidden charges.”

The Central bank also guided that any restructured loans cannot and should not affect borrower credit profile and therefore ordered banks not to file them with the Credit reference bureau as if they were bad loans.

“The event of restructuring of a credit facility arising from the direct or indirect impact of the COVlD —19 pandemic, shall not be treated as an adverse change in the credit risk profile of the borrower nor shall it be reported to a Credit Reference Bureau (CRB) as such,” Dr. Mugume instructed, adding: “There shall be no automatic adverse impact on a customer’s credit ratings or status arising from the event of being granted any restructuring- during this 12 month period.”

He, however cautioned the banks that they shall still be “required to assess the potential unlikeliness to pay, of borrowers subject to any form of restructuring, in accordance with the policies and practices that they usually apply to such assessments.”

“The responsibility of evaluating, and deciding appropriate restructuring of credit facilities during this pandemic, lies with the respective SFI,” he said.

He also took the pains to re-stress that while borrowers may request their SFls for a restructuring, if they so qualify and SFIs were allowed to make-unsolicited offers for a restructuring to their customers during this 12 months period, “SFIs are individually responsible for the decision on whether or not to extend the credit reliefs mentioned herein to their customers.”

Guidelines on repayment moratorium

In the event of repayment moratoriums as one of the many allowable credit restructuring measures, the Central Bank told the SFIs that the moratorium “should include changes to the schedule of repayments through the suspension, postponement or reduction of principal amounts, interest or full payments, for a finite period not exceeding 12 months, as agreed between the SFI and borrower.”

The central bank also guided that the accrued interest during-the granted moratorium period, shall be capitalized and amortized over the tenor of the credit facility that remains after the moratorium.

However, the central bank told the banks that “recovery of accrued interest shall be in such a manner that the expected periodic- repayments, after the expiry of the moratorium, do not in a comparable-manner, exceed those the borrower had contracted to make, prior to the grant of the said moratorium.”

While the central bank also encouraged extension of new loans, it warned the SFIs to remain cautious of the “economic and operational realities brought about by the COVID-19 pandemic, and those that might be reasonably expected to hold in the post-pandemic period.”

The central bank also said that where no exceptions or extensions or waivers or suspensions of existing legal provisions or regulatory obligations have been offered by the BoU, the existing law, regulations and directives with respect to prudential credit risk management shall remain in force.

“The BoU reiterates its commitment to continue monitoring the evolving impact of the COVID-19 pandemic, as well as the application of the credit relief measures mentioned above. The BoU stands ready to review these guidelines and to take other appropriate measures as may be warranted, in order to safeguard and ensure financial sector stability,” said Dr. Mugume.