The Gulf state is asking banks to cancel parts of consumer loans involving violations of lending rules as lawmakers press the government to bail out borrowers by settling debt worth about $4 billion (Dh14.68bn), bankers said.
The state set up a KD300 million (Dh4bn) fund this month to help citizens settle debt after parliament came close to passing a measure to force the government to buy consumer debt portfolios.
The Central Bank was negotiating with lenders on whether banks can contribute to government efforts to slash citizens’ debt by waiving some interest payments on loans where some lending rules were overridden, bankers said.
“This would affect financial results… It would also mean that banks might be reluctant to grant consumer loans in the future,” said one banking executive.
The violations include requiring borrowers to make monthly payments exceeding half of their monthly wages and granting loans for terms longer than 15 years.
“The idea is whether banks can waive some interest payments so that the 50 per cent [repayment] limit will not be exceeded but this would then mean a burden for the lenders,” said one banking source. While bankers argue that debtors were struggling due to rising interest rates, the Central Bank appeared to be trying to curb banks’ lending appetite.
The Central Bank, which earlier this year dropped a dollar peg, has been trying to discourage consumer lending by keeping the key discount rate stable at 6.25 per cent since the summer of 2006. The Central Bank was clamping down on banks granting consumer loans “too generously” in violation of regulations, said Naser Al Nafisi, general manager at Al Joman Centre Economic Consultancy. “The Central Bank is following up on violations. It is very strict.”
Nafisi said banks would have to waive interest and even payments if loans had been deliberately set for terms longer than 15 years. Reducing citizens’ debt has become a hot political issue in the state after lawmakers proposed the write-off bill.
The government has for years been trying to end an expensive nanny state tradition, which has often led citizens to take large loans in the hope of debt write-offs.
The government wrote off all consumer loans after the 1991 Gulf War that ended Iraq’s occupation of the state. It then wrote off millions more in a plan to settle $20bn (Dh73.44bn) in bad loans stemming from 1982 bourse crash.
State news agency Kuna reported earlier this week a meeting between the Central Bank and commercial banks to find ways to lower the debt of some citizens, quoting the head of the banking association, but otherwise officials have been tight-lipped on the politically sensitive issue. “It’s a political issue whether banks should make a contribution to the debt problem or not,” a banker said. The talks come at a time when the Central Bank is fighting inflation which jumped to 6.2 per cent in September. (Reuters)