Dubai: A number of UAE banks are becoming increasingly cautious on lending to retail and small and medium enterprises (SME) borrowers as defaults and loan skips are seen rising.
Many bankers who spoke to the Gulf News said they are forced to tighten lending norms for individual borrowers including business customers.
“Tough operating environment caused by the COVID-19 outbreak has impacted the cash flows of a large number of small businesses and job security of many salary earners. We are witnessing a huge demand for extension of loan deferrals and or application for new deferrals,” said a banker.
Widespread salary cuts and job losses across the private sector following the pandemic outbreak is continuing with a second wave is already under way. Many companies that implemented temporary salary cuts in April and May are either extending or are reportedly introducing additional cuts in employee pay packages.
“We are aware of such measures. In addition to credit bureau reports on individual and companies, we keep tracking market intelligence on assessing credit quality of individuals and companies,” said the retail banking head of a UAE bank.
UAE banks with the support of the Central Bank of UAE (CBUAE) had announced a number of schemes in March and April this year to support both individual and business customers impacted by COVID-19 outbreak.
The CBUAE has been proactive in making liquidity available to the banking system through a range of measures such as zero cost funding, low cost funding and relaxed regulatory capital limits and liquidity rules. Dh256 billion stimulus announced by the CBUAE includes a liquidity relief tool of Dh50 billion offered through banks to eligible customers who wish to apply for a deferment.
Relief measures for retail customers ranged from loan repayment deferral of 3 months with zero charges and interest waived for the deferral period. A number of banks made deferrals available on request for customers holding personal loans, auto loans and / or mortgage loans with no service charge.
For SMEs and business loans, the banks offered measures including interest rate cuts, loan deferrals, rescheduling of loan payments of customers impacted by the virus outbreak.
While most of these measures have been temporary in nature and expired by June end, most banks have been very selective and or reluctant in extending the relief measures.
Tightening lending norms
While the COVID-19 relief measures have somewhat postponed potential loan defaults in the second quarter, bankers and analysts expect higher delinquencies in the third and fourth quarter.
“Banks need to be prepared for higher loan impairments in next few quarters as job losses, salary cuts and business losses continue to impact loan quality,” said a banker.
Latest credit sentiment survey of the CBUAE showed, both supply and demand for bank credit has been adversely impacted by COVID-19. The survey results showed credit demand from corporates and small businesses showed a decline, with over half of bankers, (53 per cent), assessing that demand has decreased either substantially or moderately. Details on corporate demand for credit showed demand decreased across all corporate borrower categories except government related entities (GREs).
Covid-19 was seen as the key reason for decline in demand for personal loans. The trend is broadly similar for all product categories of personal lending such as personal loans, credit cards, mortgages and auto loans. The main explanation for the reduced demand in the second quarter was the adverse change of income, but the housing market and financial market outlook also contributed.
On the supply side, banks are less optimistic on lending to individuals as the job situation continues to remain fragile. In the third quarter, bankers expect credit standards for personal lending to tighten further.