Bank of Uganda COVID-19 Credit Relief and Loan Restructuring Measures for Education and Hospitality Sectors

BANK OF UGANDA

OFFICE OF THE EXECUTIVE DIRECTOR SUPERVISION

EDS.306.2

1st November 2021

37-45 KAMPALA ROAD, P.O. BOX 7120, KAMPALA

DIRECT LINE: 256-414-230051 GENERAL LINE: 256-414-258441 Ext 2403 FAX LINE: 256-414-258515 TELEX: 256-414-61059

CABLES: UGABANK Email: info@bou.or.ug Web site: www.bou.or.ug

Circular to All Chief Executive Officers of Commercial Banks, Credit Institutions, and Microfinance Deposit-taking Institutions

COVID-19 CREDIT RELIEF AND LOAN RESTRUCTURING MEASURES (CRM) FOR EDUCATION SECTOR AND HOSPITALITY SECTOR

In the Monetary Policy Statement (MPS) of August 2021, Bank of Uganda (BOU) announced that the Credit Relief Measures that were put in place from 1st April 2020; would expire and not be extended beyond 30th September 2021. Furthermore, BOU indicated that on a case-by-case basis, it would put in place policy interventions for those sectors that continue to remain under lockdown.

The uncertainty of the impact from the COVID-19 pandemic on the financial system is expected to be muted or decreasing as: the pace of economic recovery picks up; the rates of vaccine acquisition & administration increases; and Covid-19 Standard Operating Procedures (SOPs) guideline compliance improves across the country. In this period of uncertainty, it is essential that credit is available to support otherwise viable commercial entities in the Education and Hospitality Sectors, which have nonetheless, remained under complete or partial lockdown and whose calendar for reopening remains uncertain.

1) Targeted Credit Relief Measures for the Education and Hospitality Sectors

This Circular provides Guidelines directed to all Supervised Financial Institutions (SFIs) under the regulatory jurisdiction of BOU, to operationalize further credit relief policy interventions that are targeted at credit exposures in the Education and Hospitality Sectors granted before 1st April 2020 and were not classified as Loss as of that date.

SFIs are hereby given exceptional permission to provide a repayment credit relief to borrowers in the Education and Hospitality Sectors, at their discretion, who are and continue to be negatively affected by the Covid-19 pandemic. The following Guidelines shall apply effective 1st October 2021 and for 12 months thereafter;

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a) In the 12 months to 30th September 2022, SFIs are permitted to grant one restructuring to credit exposures in the Education and Hospitality Sectors that are adversely affected by the pandemic. The eligible credit exposures are those reported under respective sub-sectors, as well as staff loans to the said sectors, in the BS100 and MDI100 Forms. b) The duration of any credit relief so granted shall expire on or before 30th September 2022. c) The restructuring may be in the form of a repayment moratorium, extension of tenor, reduction of principle loan repayment instalment, reduction of applicable interest rate, or a combination of the above. d) The event of any restructuring granted will not be treated as an adverse change in the credit risk profile of the borrower for reporting to the Credit Reference Bureau nor will it affect the credit classification status or lead to a downgrade of such a credit facility, for the duration of the CRMs. In addition, it is important to note that any loan granted credit relief shall maintain the same loan classification status over the 12 months to 30th September 2022. e) This targeted forbearance shall however strictly be subject to the SFIs stopping (not postponing) accrual of interest and compounding of interest on the said loans for the duration that the facility is under credit relief. In addition, SFIs will be required to waive penalties for late payment and fees for early redemption for these loan facilities during the period that they are under this extended credit relief. f) Consumer protection must be prioritized and SFIs must ensure full disclosure of the terms and conditions of the restructured credit facility. SFIs are required to maintain records of such credit exposures in a format that can be verified by BOU and should also obtain the borrower's consent in writing.

2) Implications of the end of the Overall CRM program for SFIs

The end of the overall BOU CRM Program on 30th September 2021 carries important implications for SFIs. As such;

a) In order to ensure financial stability and enable SFIs to enhance resilience as the CRMs expire, BOU has maintained the Covid-19 Liquidity Assistance program (CLAP), as well as the restriction on payment of dividends and other discretionary payments. SFIs may apply to pay dividends subject to submitting a satisfactory internal capital adequacy assessments (ICAAP) report that demonstrate resilience to a range of potential shocks and risks. b) Effective 1st October 2021, all credit exposures, except those covered in (1) above reverted to the credit classification, provisioning, and credit reporting specified in the Financial Institutions (Credit Classification & Provisioning) Regulations 2005, and as laid out in the Financial Institutions Act (FIA) 2004 and Microfinance Deposit-taking Institutions (MDI) Act 2003 and the corresponding implementing Regulations. You are reminded that the FIA 2004 and MDI Act 2003 provide for a loan to be restructured up to two times in its lifetime, and this is regardless of

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if the borrower had benefited from any restructuring under the CRM program. SFIs may at their discretion, support any eligible borrower affected by the pandemic, by availing the said borrower with the loan restructurings allowed under the Financial Institutions (Credit Classification & Provisioning) Regulations 2005; if and only if the borrower had not yet exhausted this opportunity prior to the coming into force of the CRM program on 1st April 2020.

c) It is not in doubt that the adverse effects of the COVID 19 pandemic and the associated containment measures thereto, continue to persist over the short to the medium term for some sectors and borrowers. The impact of the expiry of the overall CRM program on SFIs' credit risk and loan loss provisions will become fully evident in the short to medium term. The expected rise in credit risk reflected in an increasing stock of non-performing loans (NPLs) may adversely affect or even impair the resilience of some SFIs within the banking sector. This will be especially true for those SFIs that entered the pandemic period with a minimal capital base and/or have a significant proportion of their credit portfolio(s) under credit relief. The end of the CRM program also provides an opportunity for SFIs to prudently re-assess and reflect the ‘true’ credit risk exposure on their balance sheet.

d) SFIs should significantly enhance their Credit Risk Management mechanisms including conducting credit risk stress tests that consider the potential impact of the expiry of the CRMs on asset quality and solvency. This stress testing must include improved assessment and provisioning for Expected Credit Losses (ECLs), prudent capital planning to enhance absorption of potential credit losses and credible liquidity contingency plans; and

e) Monthly reporting to BOU of credit relief data shall continue, until such a time that BOU decides otherwise.

The BOU stands ready to review these guidelines and to take other appropriate measures as the pandemic evolves and as may be warranted, in order to safeguard the stability of the financial system.

[Signature]

Tumubweinee Twinemanzi (Dr.) Executive Director Supervision

Copy: Governor Deputy Governor Executive Director Research & Policy Director Financial Stability Director Commercial Banking Director NBFI

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