Banks will be given further breathing space to comply with new rules capping their exposure to government-related entities through the exclusion of rated bonds and sukuk from the limits, says the Central Bank governor.

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Rated bonds and sukuk will be excluded from new rules capping banks' exposure to government-related entities, the Governor of the Central Bank said yesterday.

Sultan Al Suwaidi also confirmed that lenders would have a five-year grace period to comply with the regulations.

The caps are to be introduced within a month. They will limit the extent of loans to the Government and companies linked to the Government at 100 per cent of the lending bank’s capital base.

“We have a few banks that are over the large exposure limits and we are giving them a grace period or a period to adjust to the new limits at the rate of 20 per annum for five years,” said Mr Al Suwaidi. “We think it is a reasonable time frame and don’t think it’s a problem.”

He said rated bonds and sukuk would be excluded from the rules.

A portion of debt linked to the Government is rated by ratings agencies, including issues from the Abu Dhabi sovereign issues, the Dubai Electricity and Water Authority, and Abu Dhabi National Energy (Taqa). Dubai's sovereign debt is not rated.

“Rated ones will be excluded as they will stand on their own,” Mr Al Suwaidi said. “Also, GREs that are commercial and can stand alone from government will be excluded.”

Mr Al Suwaidi’s comments suggest the Central Bank has found a compromise with banks after initial protests about the regulations.

The bank scrapped initial proposals announced in April last year after lenders raised doubts about meeting a September 30 deadline for the rules.

Large companies with links to the Government make up a sizeable chunk of the banks’ lending books. The level of banking support to the government sector has been at its highest since the 1970s, estimates Bank of America Merrill Lynch.

Jean-Michel Saliba, the bank’s economist covering Eastern Europe, the Middle East and Africa, said the revised regulations would be easier for banks to meet than the earlier draft.

“How realistic these rules are will depend on how Dubai handles its turnover of debt going forward as a lot of refinancing has had to be done with the cooperation of banks, which have increased their exposure,” he said. “This may force Dubai to look at other ways to refinance its debt.”

The IMF estimated in July that there was about US$60 billion of debt linked to Dubai government-related companies falling due between this year and 2017.

The Central Bank is determined to avert a repeat of the debt-fuelled crisis that crippled banks after Dubai World restructured $25bn in debt in 2011. Since then, several other government-linked firms, in both Dubai and Abu Dhabi, have required similar refinancing with banks.

In another regulatory reform, the Central Bank announced last week that the value of properties that can be funded by financial institutions for first-home loans will be capped at 75 per cent for foreigners and 80 per cent for Emiratis.

Mr Al Suwaidi said the Central Bank was also working on improving macro-prudential conditions, which include the health, soundness and vulnerabilities of a financial system.

“We are looking at certain ratios, for example, the rate of growth of credit versus the rate of growth of GDP,” he said. “We have thought already about macro-prudential policies and most likely it will be linked to where we had weakness during the global financial crisis.”