New multiple of earning regulations will limit the size of loans
UAE banks will be forced to tighten their lending criteria in line with new central bank legislation, which is expected to be implemented in the coming months according to an industry insider.
The central bank is currently formulating a new multiple of earning regulation that will calculate the size of a loan the bank can provide to a customer relative to their salary in a bid to avoid any further excessive lending practices.
“I think the new multiple of earning regulation will be out soon, maybe by the end of the year,” says Suvo Sarkar, general manager of consumer and elite banking at National Bank of Abu Dhabi (NBAD).
“Prior to the downturn, customers took out loans of up to 60 to 80 times their monthly salaries. And the banks were just as much to blame for allowing this to happen.”
Sarkar says he expects the new regulation will stipulate a multiples cap of 20 to 30 times a customer’s monthly salary.
Current central bank policy states that the maximum size of a personal loan cannot exceed AED250,000.
“It’s important that loan criteria are linked to income and not an absolute amount,” says Sarkar. “Banks found a way of circumventing that law so it was meaningless anyway plus it was not clear what facilities it related to.”
Bankers expect the new law to cover all kinds of lending facilities including credit cards.
The UAE Central Bank has been working on the law for around two years, with its importance having been highlighted by the surge in loan delinquencies from customers unable to repay their debts.
“Banks tried to outdo each other in multiples of salary, which is a no-win situation as they were getting over-exposed to certain customers who themselves were compromising their financial well-being,” says Sarkar.
NBAD has posted a relatively strong performance during the downturn – its loss rates are less than half the average of other industries. Sarkar attributes this to the bank’s more conservative lending policy.
Banks’ balance sheet strains, which built up during the credit boom of 2003-2007 have been exacerbated by the surge in loan defaults (MEED 27:9:10).
This has led to a sharp slowdown in bank lending since the crisis hit, with combined loans provided by the GCC’s more than 150 banks standing at around $890bn in 2009, recording a growth of only around 2.2 per cent over the previous year, according to ratings agency Moody’s.
The increase was sharply below the 33.4 per cent growth recorded in 2008 and the record rise of 34.9 per cent recorded in 2007.