In April 2020, Bank of Uganda (BOU) put in place Credit Relief Measures (CRM) aimed at maintaining Financial Stability, and reducing the Economic Impact of COVID-19. Guidelines were also issued to Supervised Financial Institutions (SFIs) including Commercial Banks, Credit Institutions, and Microfinance Deposit-taking Institutions (MDIs) on how to apply the measures.
In February 2021, BOU extended the validity of the CRM for six months to September 30, 2021. Further, on May 4, 2021, BOU capped the number of allowable restructurings to a maximum of three, and SFIs were given permission to review and grant such restructurings.
In an interview, Tumubweinee Twinemanzi, executive director supervision at BOU said the Covid19 Credit Relief Program for borrowers affected by the COVID-19 pandemic remains in place until September 30, 2021, unless announced otherwise by Bank of Uganda.
He says borrowers who are eligible and may have been affected by the recent lockdown are encouraged to approach their SFI and have their loans restructured for up to three (3) times before the expiry of the program. Any loan repayment holiday/moratorium granted as part of the program may be for a maximum of 12 months as long as it is granted by September 30, 2021. Excepts below.
What does Credit Relief mean?
It is a re-scheduling of a debt obligation such as a loan, which provides a borrower with some form of relief in how and/or when they meet their debt obligation(s) to lenders.
What is the key Objective of the BOU Credit Relief Measures?
The Credit Relief Measures have two key objectives: (i) To enable borrowers deal with the unfavorable impact of the COVID-19 pandemic on their ability to repay loans; and (ii) To reduce the risks faced by lenders as a result of exposure to borrowers that are affected by the COVID-19 pandemic.
Does credit relief mean that the responsibility of the borrower to repay their loan has been removed?
It is important to note that credit relief DOES NOT take away the responsibility of a borrower to repay the lender. All borrowers are expected to continue servicing their loan obligations, and are encouraged to contact their lenders and apply for credit relief if they face any COVID-19 related challenges that may impact their ability to pay their loans.
For how long will the credit relief and loan restructuring program be in force?
Granting of these credit relief measures by a Supervised Financial Institution (SFI) to its customers shall run up to September 30, 2021. Credit relief can be processed for any length of time from one (1) day up to 12 months; and a credit relief granted may have an expiry date beyond the deadline of September 30, 2021.
What type of loan is eligible for credit relief?
All loans and or credit facilities in all sectors affected by the COVID-19 pandemic are eligible for credit relief. However, the credit relief applies ONLY to loans whose agreement was signed and completed by the borrower and lender before March 31, 2020.
All loans or credit facilities classified as “loss” as at March 31, 2020 are NOT eligible for credit relief. In addition, these credit relief measures DO NOT apply to ANY new credit facility approved and or granted after March 31, 2020.
How many times can a credit facility be restructured during this period?
Any loan affected by the COVID-19 pandemic can be restructured by SFIs up to three (3) times in the period April 1, 2020 to September 30, 2021. This is irrespective of the number of times it has been restructured in the past.
Who is eligible to benefit from the credit relief measures?
All borrowers (corporate entities, individuals, businesses and households) that have been or will be negatively affected by the COVID-19 pandemic can benefit by approaching their lender and applying for any of the allowable exceptional credit relief measures.
However, Financial Institutions are also allowed to make unsolicited offers for restructuring credit facilities that in their assessment might be subject to default risk as a result of the COVID -19 pandemic.
What credit relief and loan restructuring options are offered to borrowers?
After assessing the impact of COVID-19 on a borrower’s cash flows during and post the COVID-19 period, a Financial Institution can grant the following Credit relief options either individually or in combination:- (i) A suspension or reduction on the repayment of principal and or interest, applicable to the outstanding principal loan amount, (ii) Extension of the loan repayment period. (iii) Reduction of interest rate on the loan. (iv) Other forms of loan rearrangement provided for under the regulations.
If a loan is restructured such that the given credit relief (e.g. extension of loan repayment period) ends after September 30, 2021, how is this treated?
The provisions in the credit relief guidelines shall apply to any facility restructured between April 01, 2020 and before September 30, 2021, and remain in force for that facility until the date that the credit relief ends, or as advised by Bank of Uganda.
What if a Financial Institution does not accept the request of the borrower for credit relief?
In such a case, the Financial Institution shall explain in writing or some other acceptable format to the borrower, the reasons for the said refusal. The records of denials shall be kept by the Financial Institution in a format that BOU can access at a later date.
How will interest be treated if borrowers are granted credit relief e.g. deferred principal loan payments?
Interest on the credit facility whose repayment was suspended during the credit relief, may be accrued, capitalized and amortized (spread) over the revised tenor (.e.g. the remaining period after the moratorium, or additional loan extension period) of the credit facility, on condition that the periodic payments during and after the restructuring do not exceed those the borrower had contracted to make, prior to the restructuring.
The SFI can achieve this by extending the loan tenor, reducing the interest rate applicable, forfeiting accrued interest or arrears etc. For example, if a term loan was being amortized with a monthly repayment of UGX 1.5million before a moratorium is granted, the monthly loan repayments after the moratorium CANNOT exceed UGX 1.5million, inclusive of the accrued interest and or arrears if applicable. The exception is where the borrower(s) offers to pay higher instalments and there is a documented request by the borrowers, and consent by the said borrower to this effect.
Will borrowers have heavier repayment burdens after the expiry of the credit relief?
No, a customer benefiting from the credit relief shall not be required to make heavier repayment instalments on their credit facility after its restructuring, than what was being paid before the credit relief. Unless the customer offers to pay higher instalments or decides to settle the credit facility earlier and there must be documented evidence to this effect.
Will the borrower be responsible for covering the costs and fees of obtaining credit relief from an SFI?
Borrowers obtaining credit relief shall only be liable for stamp duty and any legal fees thereof. Financial Institutions shall ensure and demonstrate that the said legal fees are reasonable. All other costs and fees associated with this credit relief program during the period shall not be passed onto borrowers.
Will the borrowers whose facilities, whether restructured or not, be liable for penal interest or fees in the period from April 1, 2020 to September 30, 2021?
No penalty interest or fees shall be charged, accrued and/or earned by SFIs on any credit facility restructured during the period from April 1, 2020 to September 30, 2021. Credit facilities not restructured in the period, may, at the discretion of the SFI, be liable to the application of penal interest. However, BOU strongly advises SFIs to reconsider the application of penal interest or fees to any credit facility during the abovementioned period.
Will the granting of credit relief affect the credit classification and provisioning of that facility?
While the restructuring of a credit facility/loan would normally require a change to its classification status e.g. from performing to non-performing; any credit relief measure or restructuring EVENT granted in this April 1, 2020 to September 30, 2021 period, shall not affect the credit classification status and loan loss provisioning amount or percentage for the credit facility/borrower. In addition, the period of any repayment holiday/moratorium shall be excluded by SFIs, when counting the days past due for a credit facility that benefits from the said moratorium.
What if the borrower fails to meet the periodic loan instalments after the facility is restructured?
If the borrower fails to meet the revised periodic repayments after restructuring, then the credit facility will be subject to the normal classification and provisioning regulations. In other words, the loan repayment performance with respect to its rescheduled periodic installment payments after the credit relief is granted, shall be subject to the normal credit classification and provisioning regulations.
Do these measures have any implications for loans due for write-off?
Bank of Uganda extended the period for write-off of credit facilities classified as “loss” as at March 31, 2020, by 180 days, as long as the original write-off date was due to fall within the period from April 1, 2020 to September 30, 2021.
Will the credit relief measures affect the Credit risk status of the borrower and reporting to the Credit Reference Bureau (CRB)?
The credit relief measures are not an adverse change in the risk profile of the borrower, and therefore have no effect on the credit risk status of the said borrower and therefore should not be reported as an adverse or negative event to the CRB.
Will the credit relief measures apply to financing schemes such as the Agricultural Credit Facility (ACF)?
The applicability of these credit relief measures to financing schemes such as ACF depends on the terms of the scheme. However, any credit relief to a borrower under the ACF shall be within its terms and conditions, where possible.
How will rescheduling/or deferment of payment happen in a syndicated loan?
For a syndicated loan, the borrower will submit their request for credit relief to the syndicate lead Bank. The lead Bank will then coordinate with other lenders to make an appropriate joint decision. However, subject to the terms of the syndication agreement, and if so allowed, a Financial Institution therein can make an individual decision with respect to its exposure within the syndicated loan.
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Are borrowers required to consent to any proposed restructuring?
All borrowers MUST explicitly consent to any credit relief provided to them, whatever the form or nature of this relief.
Do borrowers have to sign revised documents to implement the credit relief measures?
For any credit relief to take effect, sign off by the borrower is not a pre-condition, but consent, in whatever form or format is. For borrowers unable to be physically present at the time the credit relief measures are put in place, their consent can be in the form of; – A recorded telephone conversation wherein explicit consent is provided; – An acceptance by email; or some other digital or electronic format.
The SFIs must then store these consents in electronic or digital format, and update the necessary paperwork/documentation once the borrower can physically be available. In the event that the borrower or their representative neglects or refrains from physically presenting him or herself to sign off the necessary documentation, when circumstances allow him or her to do so, the Financial Institution can proceed to compel him or her to appear in person for the sign off.
It should be noted that failure to regularize a restructuring that has been consented to electronically or digitally by a borrower, does not extinguish the debt, but certainly introduces doubt as to its recoverability.
Can SFIs extend new credit facilities during the COVID-19 period?
Supervised Financial Institutions (SFIs) are encouraged to extend new credit to eligible borrowers but must take into consideration the economic conditions and operational realities brought about by the COVID-19 pandemic, and those that might be reasonably expected to hold in the post lock down and post-pandemic period. All regulations and prudential guidelines with respect to risk management, except those suspended by BOU in the Guidelines for Credit Relief measures, remain in force.