Banks urged to be flexible over loan repayments

UAE banks have been urged to adopt a more flexible approach when dealing with customers who face difficulty to pay back loans.

Repayment periods should be extended and interest rates lowered – and legal action should be taken only as a last resort, said financial analysts and bankers.

The experts believe banks should form committees to negotiate with customers, discuss repayment options and reach a compromise that would enable them to recover their money while take into account the circumstances defaulters find themselves in because of the global financial crisis.

A distinction should be made between defaulters who are really unable to pay and others who are deliberately avoiding making payments.

"It would be better for banks to get back their money back over a longer period rather than have defaulters go to jail because of factors beyond their control," said one analyst.

The comments follow reports of an increase in the number of defaulters, most of whom are expatriates who have been laid off or have lost money in the equity and real estate markets.

Lieutenant-General Dhahi Khalfan Tamim, General Commander of Dubai Police, said the number of complaints related to bounced cheques has seen an increase over the past few months. And banks have been compiling blacklists of customers who have failed to pay personal loan installments of credit card bills, according to reports.

The amount of bad debt has risen from the normal level of between 2.75 per cent and 3.25 per cent of total loans and credit facilities to six per cent. This represented Dh61.3 billion of the loans total – including real estate, consumer and commercial – which, according to Central Bank figures, amounted to Dh1.2 trillion in January.

Analysts and bankers said the level of bad debt is still within acceptable limits in such exceptional circumstances – especially bearing in mind what has happened in the United States and other Western countries where banks collapsed or went bankrupt.

Federal National Council member Yusuf Obaid Al Nuaimi, who formerly worked for HSBC, estimated personal, car and credit card loans at Dh160 billion, and said the level of credit card bad debt was running at eight per cent.

"Loans obtained by UAE nationals are not classified as bad debt since they live in the country and rarely lose their jobs," he added. "As for loans obtained by expatriates, the money can be recovered if those who lose their jobs find new ones.

"Banks have raised the percentage of bad debt in their 2009 budgets in the light of indicators in the last quarter of 2008."

Al Nuaimi said he expected the level of bad debt arising from personal loans to increase in banks that gave loans without following Central Bank rules.

He called on the banks to hold on to work and residency permits of defaulters and give them a chance to find other jobs so they could repay their debts.

Analyst Ziyad Al Dabbas said the rise in bad debt related to personal loans was an inevitable consequence of the rounds of redundancies announced by a number of companies, the suspension of work on some construction projects and the drop in share and realty prices.

He said there was a lack of transparency by banks regarding levels of bad debt but estimated that the percentage was six per cent of all loans, which was within reasonable limits. "What is happening in the UAE is a fall in growth rates rather than a recession, unlike the situation in the US and Europe where credit card debts totalled billions of dollars and millions of jobs were lost.

"I would like the banks to form special committees to study each case and to differentiate between those facing difficult circumstances such as redundancy and those who were dodging their financial commitments.

"Banks must be more flexible and should reschedule defaulters' debts, allow longer repayment periods and scrap or reduce interest rates. The banks' money could be lost if a debtor were imprisoned." Sulaiman Al Mazroui, General Manager, Corporate Communications and Community Relations, at Emirates NBD, said the increase in bad debt was inevitable because of the global financial crisis and its effect on the country's economic sectors. He agreed with the six per cent estimate.

Ibrahim Abdullah, General Manager of Finance and Administration at Commercial Bank of Dubai (CBD), said there were signs that the level of bad debt in the UAE's banks had risen at an acceptable rate. The banks divided debt into doubtful loans and bad loans and allocated funds to make up for these loans in their budgets. This was considered part of standard risk procedures in normal conditions, though the level of risk was higher in times of crisis.

"The measures taken regarding these loans differ from one bank to another according to the bank's business activity and the kind of clients who are affected.

"CBD ensures that borrowers have the ability to repay. For example, a loan for a residential building is not given if the borrower relies solely on that project."


Bank studies steps to settle disputes

The Central Bank is discussing a new mechanism to settle disputes between banks and customers arising from increases in interest rates for loans, Emirates Business has learned.

Borrowers started to complain when lenders pushed up rates on loans taken out before the start of the financial crisis. A clause in loan contract enabled them to take this action.

The Central Bank has started to prepare a list of borrowers who are unable to repay personal loans and settle credit card bills, which the banks refer to as "black loans". Banks are required to submit details of people who are unable to repay loans to help the Central Bank to monitor the problem.

Banking sources said the list was divided into two categories. The first contains details of people with outstanding personal loans and credit card debts, while the second includes individuals who have issued more than four bouncing checks.

The list will help banks wishing to obtain information about the credit situation of a customer who is seeking finance. Meanwhile, a number of banking experts have set up a company called Holool to mediate between banks and borrowers who are unable to repay debts.

CEO Nimr Al Shaqaa said there were two types of borrower. The first category consisted of those who intended to repay loans but who exaggerated their ability to do so, while the second included people who faced urgent problems that prevented them from making repayments. Al Shaqaa said a lack of financial planning by individuals and the banks' rush to give loans due to the easy availability of liquidity before the crisis struck created problems.

"A neutral body that is not aligned with any party is required to solve difficulties in a way that protects the banks' money while taking borrowers' circumstances into consideration."

Business groups called for solutions to the problem of bouncing cheques at a meeting with the Dubai Chamber of Commerce and Industry (DCCI).

And they said expatriates who were made redundant should be allowed to remain in the country for longer so hey could find new jobs or settle their financial commitments.

 

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