Dealing with retail and institutional loans in the post-revolution period

Dear Mr. Chairman of the Board of Directors

Bank

Greetings,

In the context of the efforts undertaken by the Central Bank of Egypt to support and assist the banking sector in containing the current crisis and any resulting losses that could negatively affect bank performance and the soundness of banking credit, the Board of Directors of the Central Bank of Egypt issued a decision during its session held on April 12, 2011, regarding dealing with retail and institutional loans in light of the current crisis.

First: Retail Loans:

According to the principles for evaluating customer creditworthiness and forming provisions issued by the Board of Directors of the Central Bank of Egypt during its session held on May 24, 2005, consumer loans are classified as irregular after 30 days have passed since the due date of the installment. In light of the current circumstances, some arrears have appeared among regular customers granted loans for consumer purposes. Therefore, the Central Bank of Egypt deemed it necessary to consider postponing these due dates, considering that the delay in payment during this period resulted from emergency circumstances beyond the customers' control, and thus does not require forming the provisions stipulated in the principles for evaluating customer creditworthiness and forming provisions, which will alleviate the burden on banks in their income statements at this stage.

Accordingly, the Board's decision dated April 12, 2011, stipulated that banks may submit requests to the supervision and oversight sector of the Central Bank of Egypt regarding arrears of regular consumer loan customers only, within the following parameters:

Banks are permitted, according to the presented situation, to defer existing due dates—during the months of January, February, and March 2011—for their regular customers (according to the rating as of December 31, 2010) for a period of three months from their due date at the latest, observing the following:

1. No late interest shall be calculated on customers who did not settle their debts during the months of January, February, and March 2011.

2. This deferral shall not result in considering these facilities as irregular, considering that the non-payment during this period resulted from emergency events that affected customers' ability to pay.

3. Banks, when notifying the Egyptian Company for Credit Information, must follow the same methodology in the credit reports sent and the criteria for listing customers on the negative list.

In addition to the above, banks shall re-evaluate the risk level resulting from their retail products and programs according to the new circumstances that may negatively affect customers' ability to pay in the future.

Second: Institutional Loans:

Given the impact of the current crisis on the credit facilities portfolio of institutions, which may negatively reflect on the financial position of banks, the Board's decision dated April 12, 2011, included some guiding steps that banks should use in studying their credit portfolio position, leaving banks the freedom to make the appropriate decision regarding institutional loans according to the study prepared for the customer and the credit policy of each bank.

Accordingly, the decision stipulated the necessity for banks to establish an organized mechanism to contain the repercussions of the crisis, which may negatively affect portfolio quality, bank profitability, and liquidity, including at a minimum:

1. Developing a plan to review existing credit facilities for all customers urgently, as well as the provided guarantees, studying the situation of each customer individually, taking into account the impact of the current crisis on customers' ability to pay and the quality of credit granted to them, and establishing clear policies for dealing with each customer according to their specific risk level, and thus taking necessary measures according to the case.

2. Analyzing overall risk and studying the impact of the crisis on different activity sectors and evaluating their performance, while outlining strategies to deal with potential losses and studying the postponement/installment rescheduling for customers of those sectors according to the results of the prepared study and the bank's policy in this regard.

3. Specifically for the tourism sector, due dates for its customers' installments shall be postponed for a maximum of six months (from January 2011 until the end of June 2011) and considered a grace period to mitigate the negative effects suffered by the sector, without calculating late interest on deferred installments and ensuring that this does not result in considering these facilities as irregular. It is confirmed that banks must observe the same methodology in credit reports sent to the Egyptian Company for Credit Information regarding companies subject to reporting conditions.

4. The bank conducting stress tests (Stress Testing) at the level of activity sectors and at the level of the credit portfolio equally. Several assumptions and scenarios can be set to measure the extent of the bank's impact by adverse variables and events, including assumptions specific to the investment portfolio or the extent to which the quality of credit granted to customers is affected, and setting alternative plans to face potential scenarios and mitigate associated risks. This is with the necessity of studying the impact of those scenarios on the capital adequacy criterion, profitability and liquidity criteria, and other financial indicators that reflect the stability of the bank.

The supervision and oversight sector of the Central Bank of Egypt shall be provided with a summary of the credit risk analysis for the institutional loan portfolio and activity sectors, and the results of the stress tests as stated above.

Please accept our highest respect,
Gamal Naguib

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