BoU Issues Guidelines On Covid-19 Crisis, Warns Banks Against Levying Extra Fees

The Bank of Uganda (BoU) has warned financial institutions against levying extra charges or fees when restructuring loans for borrowers as the country grapples with the coronavirus pandemic.

In the guidelines issued by the acting Deputy Governor, Dr Adam Mugume, on Tuesday, April 14, the banks must also desist from demanding that some borrowers clear their arrears before being given other loans during this period.

“The borrower, whose ‘credit facility benefits from a restructuring in this 12 month period, may be liable for only the Legal fees and Stamp duty associated with the restructuring. The SFI must ensure, and will be required to demonstrate, that the associated Legal fees are reasonable, if charged,” he said.

“The event of restructuring of a credit facility arising from the
direct or indirect impact of ‘the COVID -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,” he added.

Dr Mugume also warned that payment of arrears as a pre-condition for ‘restructuring is temporarily suspended during this. 12 month period.

“However, supervised financial institutions (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

He said restructuring is allowed for one year, effective April 1, 2020 to March 31, 2021.

“These Guidelines shall be in effect for 12 months effective April 1st 2020, and shall be applicable only to credit facilities not classified as Loss as at 31st March 2020. It is important to note that these guidelines are NOT applicable to any credit facility granted after 1st April 2020,” the circular dated April 14 reads in part.

See full circular below

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GUIDELINES ON CREDIT RELIEF AND LOAN RESTRUCTURING MEASURES FOR SUPERVISED FINANCIAL INSTITUTIONS (SFI) DURING THE COVID-19 PANDEMIC

It is now evident that the COVID-19 outbreak has affected the financial health of corporate entities and households, across all sectors of the economy, and impaired the ability of borrowers to meet their debt obligations. This is a threat to the stability of the financial sector.

During this period of uncertainty, it is essential that the financial intermediation process goes on, and that credit is available to support otherwise viable commercial entities that are central to keeping Uganda’s economy running.

This Circular provides Guidelines to operationalize the credit relief and loan restructuring measures announced in the Monetary Policy Statement of April 6, 2020.

These Guidelines shall be in effect for 12 months effective April 1st 2020, and shall be applicable only to credit facilities not classified as Loss as at 31st March 2020. It is important to note that these guidelines are NOT applicable to any credit facility granted after 1st April 2020.

General Provisions

These guidelines are directed at all Supervised Financial Institutions (SFI) within the regulatory jurisdiction of the Bank of Uganda. The accommodations on restructuring provided for herein, are motivated by the COVID-19 pandemic, and will be valid until 31st March 2021. Bank of Uganda (BOU) may however extend this deadline in the future depending on the evolution of the effects associated with. the COVID-19 pandemic. The following shall apply to the restructuring of credit facilities by FIs, where the said restructuring is a response to the COVID-19 pandemic:

In the 12 month period with effect from 1st April. 2020, 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. A SFI may, on application to BOU, request for further restructuring(s) during this 12 month. period. It is pertinent to note that a repayment moratorium is just one of many allowable types of restructuring;
Payment of arrears as a pre-condition 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;
A borrower, whose ‘credit facility benefits from a restructuring in this 12 month period, may be liable for only the Legal fees and Stamp duty associated with the restructuring. The SFI must ensure, and will be required to demonstrate, that the associated Legal fees are reasonable, if charged;

d. The event of restructuring of a credit facility arising from the direct or indirect impact of ‘the COVID -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;

SFIs 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;

Consumer protection remains a regulatory priority and SFIs shall ensure full disclosure and act in the interest of customers, with no hidden charges. 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 1.2 month. period. A borrower MUST consent, and proof thereof be obtained by their. SFI, for any restructuring offer by: the latter to the foimer;

g. Borrowers may request their SFIs for a restructuring, if they so qualify. However, it is allowed for SFIs to make unsolicited offers for a •restructuring to their customers during this 12 months period..

SFIs intending to provide credit relief under these guidelines must have in place a policy for the implementation of the said guidelines. In addition, SFIs are individually responsible for the decision on whether or not to extend the credit reliefs mentioned’ herein to their customers, and similarly for compliance with these guidelines..
11em SFIs are hereby given exceptional permission to provide a repayment moratorium to borrowers, who in the assessment of the SFI, are or shall be negatively affected by the CO YD-19 pandemic. Any such granted repayment moratorium shall be guided by the following:
It 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.
Accrued interest during the granted moratorium period, shall be capitalized and amortized over the tenor of the credit facility that remains after the moratorium..
Recovery of accrued interest shall be in such .a manner that the expected periodic repayments, after 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.
A repayment moratorium cannot be granted for a period exceeding 12 months, and should be granted before 31st March 2.021.. The period of the moratorium shall be excluded by SFIs from the counting of days past due;
The credit classification status and loan loss provisioning amount or percentage for an existing credit facility, shall remain unchanged throughout the duration of the granted repayment moratorium.
SFIs may offer, though borrowers are encouraged to request for, repayment moratorium(s).
SFI reporting to a CRB on a credit facility subject to a moratorium is suspended until the expiry of the said moratorium.
The assessment of a borrower’s likely inability to pay shall be based on their performance with respect to the rescheduled payments, in the post moratorium period..
Write-offs of Loans and Advances classified as Loss as off` 31st March 2020

BOU hereby extends by one hundred and eighty (18Q) calendar days the write-off date of credit facilities classified as Loss, if and only if, the original write-off date falls due within the 12 month period from 1st April 2020.

New Credit During this Pandemic Period

The extension of new credit by SFIs is encouraged, but SFIs MUST take into consideration 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. In addition, SFIs shall update their policies and measures to address the credit, liquidity, market and operational risks associated with this COVID-19 pandemic period.

It should be noted 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 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.

Adam Mugume (PhD)