Economists believe it will take more than two quarters before UAE inter-bank lending rates begin to ease despite a liquidity infusion by the government.
Eibor, the rate at which banks lend to each other, has only marginally reduced after initiatives like a direct liquidity injection and dollar-dirham swap.
The lending spree that banks went on during the boom days led to a high advances-to-deposits ratio. Analysts feel that a balance in this ratio, that went above 100, and additional policy initiatives from the government are a few moves that would contribute towards easing of Emirates Inter Bank Offered Rate, that serves as a yardstick for other interest rates in the economy.
For the corporates, days of easy finance are likely to stay elusive for some more time. "In spite of injection of funds, any significant ease in the inter-bank lending rates is unexpected at least for next two quarters," said Amr Abol-Enein, researcher at ING Banking.
"In the next two quarters inter-bank lending rate is likely to stay high. In the present situation, where liquidity is an issue and wholesale funds market has dried up, it would still take some time. It is not too certain, may be not in 2009," said Abol-Enein.
Eibor has only marginally eased from its peak of 4.7 per cent in November last year. The high inter-bank rate is one of the key contributors to banks staying stringent on extending finance to customers, including the corporates.
The UAE Central Bank announced a dollar-dirham swap facility in December apart from a direct liquidity infusion.
However, according to economists, many such initiatives would be required to ease the present situation.
They also asserted on the need to see more policy measures. "Banks overstressed themselves during the good days. Advances-to-deposit ratios were way above 100 per cent. In the present situation, banks need to balance this ratio because even if there is an ease in liquidity, it would not help much," felt Marios Maratheftis, regional head of research, Standard Chartered Bank.
"Eventually, it would be the growth in deposits that would improve the scenario but again, that cannot happen overnight. It would be tough for companies to get easy credit this year," said Abol-Enein.
Researchers said another direct injection of liquidity would contribute to ease the situation, and things would improve if the government places deposits with the banks. "In the present situation, the necessary tools with the Central Bank to manage the situation are limited. For instance, a repo window in repo markets on a business-as-usual basis would help because as of now, banks across the globe are not comfortable placing their assets as a collateral to borrow. There is still a stigma attached to it," said Maratheftis.
Eibor can ease in the coming two quarters depending on such policy measures.
"The situation is not restricted to the UAE, it has been happening around the world. Only when we see the economy stabilising can we expect things on this front to look up."