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01 December 2023

Making a case for credit bureau

By Zaid Kamhawi

Towards the back end of 2009, the Central Bank released its most recent figures relating to non-performing loan provisioning at UAE banks. The news was hardly surprising. Set asides or bad loan provisions by lenders in November had jumped 10.3 per cent to Dh32 billion. The same figure had stood at Dh29bn a month earlier and around Dh19.7bn a year earlier.

Provisioning for potential defaults accounted for much of the drop in profits among banks throughout last year, and continues to be its Achilles' Heel in the new year. That banking in the UAE is badly in need of better risk management is incontrovertible. A lesser acknowledged fact is that most of these bad loans were a result of lending decisions taken without the support of accurate information about the creditworthiness of these borrowers, and a more sobering fact is that a more co-operative approach by banks with regards to credit information sharing can go a long way in overcoming the provisioning rut and instilling long-term safeguards in banks' balance sheets.

In banking, as in life, forewarned is forearmed.

One might argue that the UAE has always had a high-risk lending atmosphere and that banks continued to lend and swell their profits without any hindrance for years. There's no denying that truth. Banks in the UAE made a lot of loans to total strangers over the years. However, in the good times, when almost everyone was flush, repayment was mostly a given. Financial institutions lent money easily, and their own incomes soared as a result.

In this much more challenging period, however, banks have been forced to reassess the likelihood of repayment. As a consequence of the global financial crisis, more and more borrowers have been unable to meet their obligations. As a result, banks have had to progressively increase their provisioning against non-performing loans or NPLs for the bad loans that were given out in good times. These massive loan loss provisions have had a direct impact on overall profitability, largely explaining why the combined net profits of banks here plunged in the first three quarters of 2009.

Another cause of concern for banks is occurrence of large family-owned businesses defaulting on their loans. Further, banks typically ought to declare a loan as non-performing 90 days after the non-settlement of the amount due.

However, fearing an increase in reported losses, some banks are not disclosing their true NPL figures. They are trying their best to keep customers from defaulting, negotiating to restructure loans when feasible.

Prudently, the UAE Central Bank asked banks here to increase their provision requirements. Such provisioning is clearly impacting overall bank profitability.

General economic uncertainty is also forcing banks to become more cautious in their lending activities. They are finding it difficult to accurately assess new loan applicants and the risk profiles and overall exposure of existing customers. As a result, they are simply lending less.

Because banks make money by lending it, this is further impacting profitability, making an already difficult situation even worse. The root of the problem is that banks have not invested enough in acquiring the information they need about prospective and existing borrowers' creditworthiness. If banks had access to their customers' credit information, they will be able to expand credit on the basis of the customers' true standing. They could minimise risk and maximise returns.

Additionally, banks today need to be able to assess the risk associated with and total exposure of their own loan portfolios. Only when they have accurate information about the risks represented by existing customers will they be in a position to manage their way out of the current situation and renegotiate terms with those same customers. This enables them to reduce defaults and hence total provision requirements.

Moreover, credit information assists banks in their collection efforts and helps increase recovery levels. With credit information, banks can dedicate more time, effort and resources on the loans that are most likely to be recoverable.

Credit bureaus enable banks to take preventative measures by making more informed and higher quality lending decisions, and are essential to a knowledge-based economy. In simpler terms, what credit bureaus do is help banks get to know their customers better – turning strangers into friends and risk into security. 

- The author is Chief Business Officer at Emcredit. The views expressed are his own.


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