The days of elasticated credit card limits are over, UAE residents have been told.
As banks ramp up efforts to rein in consumer over-indulgence, the level of funds available on plastic are being systematically slashed.
Reports began to emerge late last year of banks making credit card limit reductions of as much as 80 per cent. The policy has continued unabated, with some customers reporting their limits have been cut without warning.
The war on reducing credit has been dubbed 'limit rationalisation' by UAE lenders, who based their moves on various factors, including income, spending habits and repayment behaviour. Allocating limits for new customers follows the same guidelines, but is simpler to execute.
"Given the scale of the meltdown in the financial and real estate markets, it is natural to expect an escalation in the level of impaired assets in the cards business. In the UAE, although direct exposure to toxic assets was limited, it nonetheless had a cascading impact on liquidity and slowdown of economic activity," says Vimal Kumar, Cards Business Head, Mashreq. "In recent months, we recognised the associated risks and have tightened our belts by correcting exposure on cardholders to make sure they do not over-extend their borrowing and manage their finances sensibly."
Barclays' Head of Credit Cards, Zeeshan Saleem says: "As a prudent financial entity it is our ethical responsibility to lend based on a customer's repayment capacity. Limit reduction is a potent tool in pre-empting stress for the borrower while limiting the lender's exposure – a situation in the interest of both parties. He says the bank has ensured clear and early communication to all customers of any changes to their credit limits.
However, Barclays declined to comment on the types of customers targeted for reductions and whether they would increase limits again.
Banks in the UAE say the move is necessary to lend money based on customers' repayment capacities.
Thimal Perera, Regional Head of Credit Cards at HSBC, says the bank reviews its customers' card usage, payment patterns and associated risks as an ongoing practice "and in line with market conditions," declining to disclose the number of customers who have been affected.
"Based on this information, credit limits are adjusted upwards and downwards. These changes are in the natural course of our credit card business and as a responsible lender these are done to ensure customers enjoy the financial flexibility they desire and are in a position to repay their debts," Perera says. He adds all customers whose limits are revised have been informed through mail.
However, a number of customers have complained of not receiving adequate warning. Some have discovered their newly decreased card limits while out shopping or paying restaurant bills.
Dan Mills (name changed), a media worker, said HSBC informed him by SMS last month about his card's "revised limit" with immediate effect. He called the bank's customer service line to find out his credit had been reduced from Dh45,000 to Dh30,000.
Mills said he's never had a late or missed card payment and was a regular card user. "For a while HSBC kept increasing my limit. However, I stopped charging things to my card over the past six to seven months and recently had the text saying they've cut my limit down to Dh30,000."
Other credit cardholders said they have had no warning of the limit reductions causing them to overspend. Jennifer Hansen, a school teacher in Dubai, found out the limit on her Dubai First Visa card was cut after she called the supplier to check her balance. She was told that her limit was reduced by Dh5,000 on January 15 in line with "internal criteria in the credit department".
Customer service representatives at Dubai First said the cuts were made on a "temporary basis" and would be restored to their original levels in one to two months. They added: "Customers don't have the option to request a credit increase at this time."
Ibrahim Al Ansari, CEO of Dubai First, told Emirates Business the bank "periodically reviews and adjusts limits of its diverse customer base. There are several criteria we consider when determining credit limits, including salary and usage. Changes in credit limits are communicated to customers."
Citibank also said it adjusts credit limits as an ongoing standard process based on spending and payment patterns of its existing customers. However, William Keliehor, Credit Cards Head at Citibank for Middle East, Africa and Pakistan, added: "Despite the economic downturn, Citibank has not made any unusual credit limit reductions to date. The bank strives to issue credit limits responsibly to customers based on their income levels, ability to pay, and other criteria."
At Mashreq, Kumar said any such cuts are carefully considered. "Our participation strategy is not a 'one shoe fits all' strategy but is driven by our understanding of the risk profile within each segment or geography."
Defaults up Internationally
Local banks may be taking their cue from the nervous United States market, where analysts expect credit-card defaults to cross 10 per cent this year, wiping out more than half of annual profit for lenders.
Loan failures are about to surpass a previous high of 7.53 per cent as people losing jobs can't repay debt, according to Fitch Ratings. The defaults may peak at 11 per cent of loans, adds Goldman Sachs Group analyst Brian Foran.
"This is going to be an awful year for the credit card industry," Bank of America CEO Kenneth Lewis told lawmakers this month.
Banks that got cash from the US Treasury after losses tied to mortgage securities may now have to add billions to reserves for credit-card defaults. They are cutting credit lines, raising interest rates and scaling back on mail solicitations to brace for losses. Citigroup, Bank of America, JPMorgan and American Express are the biggest card lenders. (Hugh Son)