The Central Bank of Egypt has instructed local banks to shorten the grace period for SME loan repayments before classifying them as non-performing loans (NPLs), banking insiders tell EnterpriseAM. Effective this month, SMEs will be downgraded to “default” status after 90 days of non-payment, down from the previous 120-day threshold, our sources tell us.

Why this is important: The move is designed to insulate the industry against credit risks. By forcing earlier recognition of defaults, the CBE ensures banks maintain healthier balance sheets and adequate provisions. “The more a bank hedges early on, the better its financial position. A bank that covers NPLs with sufficient provisions enjoys financial strength that protects depositors,” former Industrial Development Bank Chairman Maged Fahmy tells EnterpriseAM.

The latest move is part of the final phase of the CBE’s roadmap to implement the International Financial Reporting Standard (IFRS 9), first rolled out in February 2019 to tighten precautionary oversight, EG Bank Board Member Mohamed Abdel Aal tells EnterpriseAM. To support the SME sector, the CBE postponed the full implementation of these rules in FY 2020-21 due to the economic fallout of the Covid-19 pandemic.

The decision to reduce to 90 days “was not a surprise, it was implemented in gradual phases over the recent period to support SMEs,” a government source in the SME sector tells EnterpriseAM. The move follows a cut to 120 days in June last year from a cut to 150 days in June the year before that following the end of the pandemic-linked implementation delay.

The potential impact on clients

Increased scrutiny: The decision will force banks to be more selective, activating risk management systems to choose “serious” borrowers and avoid a spike in bad debt, our government source tells us.

Closing loopholes: Under the previous, longer grace periods, some irregular clients were able to secure new facilities from other banks before their default appeared on records. “The rapid credit rating classification will now close those doors to defaulting clients,” Fahmy added.

But there are some benefits for clients: Despite the tighter rules, banks are still mandated by the CBE to offer technical and financial support to borrowers who have defaulted or are irregular borrowers whose payment delays exceed 90 days. “This is done by opening negotiation channels and studying financial positions to restructure facilities based on realistic repayment capabilities,” Abdel Aal explained.

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