Lenders forecast drop in non-performing loans

Top mortgage lenders in the UAE predict that non-performing loans (NPLs) will drop in the coming months, though recent Central Bank figures showed that banks have increased provisioning for bad loans.

Speaking to Emirates Business, the lenders said the situation will improve as the industry sees more clearances on foreclosures and banks give more leeway for loan rescheduling.

The Central Bank figures bear out this outlook – while the provisions for bad loans did go up sharply year-on-year till March 2010, the figures indicate a considerable slowdown in provisioning over the first quarter of this year. Between January and March, there was only a Dh1 billion rise in bad loan provision, whereas between December 2008 and January 2010, the NPL provisioning went up by Dh13.7bn.

The lenders said the property outlook remains challenging, but the initial progress on repossessions and more co-operative attitude from banks on repayments are reducing the number of payment defaults.

"There are some more to come because there is still uncertainty, but we have seen NPLs going down in the past three months," said Varun Sood, CEO, Home Finance, Tamweel. "We expect it to decrease as when you start to see more foreclosures, you will also see reduction in NPLs."

Barclays has in January won the first foreclosure orders in Dubai, clearing the way for lenders holding about $16bn (Dh58.77bn) of Dubai home loans to take action when borrowers do not pay. The order is not yet executed, according to people familiar with matter, but it is expected that more repossessions will help reduce the amount of bad debt on banks' balance sheets.

Provisions for bad loans in the UAE went up by 68 per cent by to Dh32bn as of November compared to previous year.

Tamweel has several of its own foreclosure claims pending, and estimates about three per cent of its mortgages are in default.

"We saw NPLs coming down in 2009. The first quarter of 2010 is much better than the first quarter of 2009, so this gives a lot of comfort to the banks," said Sundar Parthasarathy, ADCB SVP and Head of Consumer Assets, Consumer Banking Group.

Another reason for the reduction on NPLs is the banks' co-operative attitude in dealing with delayed payments. Parthasarathy said default rate remains under control because customers are now pro-actively coming to the banks and are discussing ways of rescheduling the debts.

"People come and say, 'Look I lost my job but based on my qualification, I can probably get a job in three months.' That is a genuine situation. A three-month moratorium is fine and, in that case, it's no longer a default," he said.

Damian Hitchen, Managing Director, Gulf Lenders Network, added: "This is a more challenging year, but one of the positive things that's happening is that banks are becoming more co-operative.

"They are working with their clients and are looking at rescheduling of repayments. In the past, they [developers] said, 'We have a security cheque and if you don't pay, we'll go to the bank.' "There was a stick used to get customers to pay. Now, there is a realisation that being heavy-handed on a mortgage problem doesn't help solve the problem. At the end of the day, the average term of the loan is 15-20 years in the UAE.

It's not a credit card or a two-year personal loan, so they have to be treated accordingly." It is considered a crime regardless of the reason behind the incident, under the UAE law, when a cheque is returned due to no or insufficient funds.

As per the Penal Code Article 401, the punishment for a bounced cheque is either a fine of a minimum of Dh1,000 or a jail term.

"The practice here is that many judges won't go behind the reason for issuing the cheque," said Hassan Arab, Partner and Head of Dispute Resolution, Al Tamimi and Company. "The most important thing is that the banks should have more control on selecting customers who should have the cheque books.s and dealing with the cheques."

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