Circular dated March 22, 2016 regarding clarifications on instructions for SMEs, credit portfolio concentration, and consumer loans issued January 11, 2016

Cairo: 22 March 2016

Dear Mr. Chairman of the Board of Directors,

Greetings,

With reference to the instructions issued on January 11, 2016, regarding the limits of concentration of banks' credit portfolios, the ratio of the value of due installments to the individual's monthly income regarding the consumer purpose loans portfolio, as well as encouraging banks to grant loans and credit facilities to small and medium-sized enterprises (SMEs), and with reference to the meeting held on January 14, 2016, at the head office of the Central Bank of Egypt to discuss banks' inquiries, we are honored to attach herewith some clarifications regarding these instructions.

Please be so kind as to alert regarding taking the necessary measures in this regard.

Accept our highest respect,

Gamal Naguib

First: Inquiries regarding the instructions issued on January 11, 2016, concerning the limits of concentration of banks' credit portfolios:

Second: The following must be observed:

1. The total credit facilities granted to the top 50 clients are calculated based on the client, not the facility, except in the case of credit facilities in the form of an "irrevocable commitment" that has not yet been utilized, in which case the authorized limit is relied upon.

2. When calculating the total credit facilities for the top 50 clients, credit facilities granted to both regular and irregular customers are included.

3. The net credit facilities granted to the top 50 clients and the bank's credit portfolio are calculated in accordance with the regulatory instructions issued on December 24, 2012, regarding the treatment of guarantees and provisions under the minimum capital adequacy standard within the framework of applying Basel.

4. Cash guarantees provided by the client in a currency different from the currency of the credit facility are considered for the purposes permitted by the regulatory instructions issued on December 21, 2015, and its subsequent circulars, regarding refinancing import operations.

5. If the total credit facilities granted to the top 50 clients and their related parties to the bank exceed 50% of its credit portfolio, it is emphasized that an additional risk weight is applied to the currently applied risk weight according to the regulatory instructions regarding the minimum capital adequacy standard mentioned above, on the value of the excess when calculating the capital adequacy standard, as follows:

   a. 200% if the mentioned ratio ranges from more than 50% up to 70% of the bank's total credit portfolio.

   b. 300% if the mentioned ratio exceeds 70% of the bank's total credit portfolio, applied to the excess value that exceeds 50%.

Second: Inquiries regarding the instructions issued on January 11, 2016, concerning the ratio of the value of due installments to the individual's monthly income regarding the consumer purpose loans portfolio:

1. Banks must strictly adhere to the matching of the maturity of their assets and liabilities according to the repayment schedules.
   This applies when granting loans for consumer purposes.

2. For the calculation of the ratio of due installments to monthly income, the portion covered by guarantees that are considered when forming provisions for loans and facilities is excluded.

3. All standards relied upon in the method of calculating the monthly income of customers and the validation process by the bank's board of directors, especially for customers whose monthly income cannot be proven, are adopted.

4. The instructions do not apply to existing credit card limits provided that they are not increased in case the prescribed ratio is exceeded.

5. Loans granted by banks to their employees are exempt from the prescribed 35% ratio, and the ratio in this case is increased to 50%.

6. Banks must ensure that commercial establishments / retail outlets that grant their customers payment facilities to purchase consumer goods, as well as car companies, apply the prescribed 35% ratio in their transactions with their customers, in case dealing with these entities in any aspect of employment.

Third: Inquiries regarding the instructions issued on January 11, 2016, concerning encouraging banks to grant loans and credit facilities to small and medium-sized enterprises:

1. To confirm what was stated in the first item of the issued instructions, the 20% ratio of the bank's total credit facilities portfolio is calculated based on the user of direct credit facilities.
   and indirect.

2. Call centers in banks are to be re-equipped to be ready to respond to inquiries and complaints from customers of small and medium-sized enterprises.

3. Banks must begin equipping their systems to allow reporting the volume of revenues of companies to the Egyptian Credit Reference Company (Score-I) as well as the General Administration for Collecting Banking Credit Risks at the Central Bank of Egypt.

4. Confirmation of what was stated in the instructions that the means of stimulating financing for micro-enterprises will be dealt with separately.

5. The following are excluded from the scope of application of these instructions (regarding the prescribed 20% ratio for banks' portfolios for small and medium-sized enterprises, as well as the application of a reduced lending rate of 5%):

   a. Loans and credit facilities granted to associations, charitable institutions, and microfinance companies.

   b. Loans and credit facilities granted to financial companies according to what was stated in the circular dated August 24, 2004.

   c. Fully covered loans and credit facilities.

6. Banks must obtain information indicating the volume of business of fully covered small and medium-sized enterprises to allow reporting them according to the new definition by the General Administration for Collecting Banking Credit Risks at the Central Bank of Egypt and the Egyptian Credit Reference Company (Score-I).

7. Coordination is to be made between banks based on the data available through the General Administration for Collecting Banking Credit Risks at the Central Bank of Egypt and the Egyptian Credit Reference Company (Score-I) to avoid customers obtaining loans and credit facilities from one bank to be used to repay credit facilities granted to them by another bank, in order to benefit from the support provided by the Central Bank according to the instructions issued in this regard.

8. Banks are committed to ensuring that credit facilities granted to small and medium-sized enterprises are used for the purposes and fields specified in the credit approval, as follows:

   a. It is necessary to include in the financing contract signed with the customer a statement of his commitment to use the financing for the purpose for which it was granted.

   b. These companies must not use the credit facilities granted to them to link deposits.

   c. It is necessary for the bank's credit policy to determine the method of continuous follow-up for the purpose of using what is withdrawn from the facility.

   In case of non-compliance with this item, the customer is charged the difference between the preferential lending rate he received and the prevailing interest rates at the bank on the date of granting.

   On the other hand, the definition of small, medium, and micro-enterprises issued according to the decision of the Board of Directors of the Central Bank of Egypt in its session held on December 3, 2015, regarding capital for newly established companies, is modified as follows:

   a. For new medium-sized companies and enterprises (newly established), the paid-up capital is modified to become "more than 5 million pounds to 10 million pounds for industrial establishments, and more than 3 million pounds to 5 million pounds for non-industrial".

   b. For companies and enterprises (newly established) according to the definitions table, they are merged with small ones in terms of capital, and the customer is classified as small in the first year until he obtains his business volume.