New rules will curb lending

New personal lending regulations introduced by the Central Bank earlier this year are expected to curb retail loans although banks in the UAE now have sufficient liquidity, a prominent banker has said.

Michael Tomalin, CEO of the government-controlled National Bank of Abu Dhabi (NBAD), said the liquidity situation in the UAE banking sector, the largest in the Arab world, has dramatically changed compared with 2010.

He said the sector suffered from a liquidity crunch through 2010 while high oil prices and a surge in capital inflow reversed that situation this year.

“Regarding retail, UAE banks are generally aggressive lenders to the retail market. However, the new central bank regulations for retail products and services, which are sensible, will actually reduce lending. This is not the fault of the banks, though,” he told Oxford Business Group in an interview as part of its 2011 country report for Abu Dhabi, released this week.

The new central bank lending regulations, enforced in May, capped personal loans at 20 times a borrower’s monthly salary and stipulated the loan must be repaid within 48 months.

The regulations cover all retail loans including personal, car, housing loans and credit credits. They are intended to control lending activity and excessive charges by banks following public complaints about a surge in bank fees.

Personal loans in the UAE had surged by at least 35 per cent during 2006-2008 before they sharply slowed down over the past two years following the 2008 global fiscal crisis and regional debt default problems.

Tomalin dismissed reports that banks have become too careful in lending since the global crisis, saying they simply had no money to lend in 2010.

“Frankly, I do not accept the premise of the argument that banks are too cautious with regards to lending practices. In 2010 there was undoubtedly tightness in liquidity, which could be seen in the statistics from the central bank, and, basically, banks cannot lend money that they do not have,” he said.

“At that time, due to the financial crisis, lenders did not have enough because capital markets were closed to some banks – not all I should stress, but some.

“So, generally speaking, liquidity was tight. Moreover, the inter-bank lending market was changed forever – and this was a global phenomenon.”

Tomalin said banks now would only lend to one another on a short-term basis so the idea of borrowing money from another bank for three months and subsequently lending that to customers “has fallen away.”

“As a result, banks’ hands were tied. At the same time, it needs to be noted that a number of companies were very cautious about wanting to borrow at that time…in early 2011, however, things began changing.”

He said the high dirham interest rates, relative to US dollar, caused quite a substantial inflow of money into the country while a surge in crude prices generated cash, adding that this had led to a dramatic change in the liquidity conditions that were prevailing through most of 2010.

“Banks are today much more flush with cash and have a greater ability to lend. But is there a willingness to lend and what is the appetite for borrowing? ...from the perspective of the big government-related entities there is no problem, as they have no issues gaining access to finance, whether it is from banks or global markets... for the private corporate players, we never decided not to lend to this segment for liquidity reasons – it would always be a decision about the bankability of a given project.”

Tomalin said new personal loan rules meant that there should be a rules-based approach to provisions. In other words, he added “if you lend to a customer and they do not start to repay after 90 days, then you should start making a provision. Corporate lending, on the other hand, is much more complicated and therefore does not rely on rules, but rather employs a principles- based approach.

He said the central bank has set out the principles and it is really down to management to have a sensible view and for the auditors to review bank decisions for soundness.

Follow Emirates 24|7 on Google News.