The Central Bank's plans to ease repayment burdens on UAE nationals will result in banks taking a 50 per cent haircut on some personal loans, as the Government attempts to restructure the private debts of the most indebted Emiratis.
Banks are expected to shoulder the burden of debt forgiveness, said Jonathan Morris, Standard Chartered's chief executive for the UAE.
"Banks are being asked to write down around 50 per cent and the Government will take off the rest," he said. "It's a loan, not a free cheque, as we've seen elsewhere in the region."
The credit boom until 2008 resulted in a surge in levels of bad debts once the global financial crisis hit, leaving banks forced to set aside large sums of money to patch up their balance sheets.
However, lenders fear that writing off billions of dirhams of debt may fail to deter some customers from borrowing more than they can repay in future.
The Central Bank discussed ways to reduce indebtedness among nationals at a board meeting last week.
"The monthly instalments deducted from the monthly salaries of Emiratis towards repayment of these loans [debt service] are rather high," it said. "The board instructed further study and more cooperation and coordination with all concerned agencies to find appropriate solutions, which would alleviate the burden of these loans on Emiratis."
In January, a presidential decree announced the settling of the personal loans of 6,830 Emiratis who were in default at the time. The loans, all less than Dh1 million (US$272,242), totalled about Dh2 billion.
As part of the deal, those Emiratis in prison for their debts were to be released from jail andwill have their loans settled, according to a statement from the Wam news agency.
Instalments worth 25 per cent of monthly salaries will be deducted until the loans are repaid under the new terms. Eight banks in the Emirates have signed up to the deal.
But question marks remained over how the agreement is to be administered, particularly in cases where the individual is out of work or has loans from several banks, said Tom Smith, the head of retail banking at United Arab Bank.
"The whole mechanism and the ability to repay still needs to be clarified," he said. That decree followed the establishment of a Dh10bn fund aimed at easing debt burdens on low-income Emiratis.
The bankable population of Emiratis stands at about 300,000, said Arup Mukhopadhyay, the head of Abu Dhabi Commercial Bank's consumer banking division.
However, it is impossible to ascertain how indebted nationals are, relative to the expatriate population, because the country lacks a federal credit bureau to assess each customer.
Personal lending to UAE residents reached Dh252.1bn in December, an increase of 2 per cent on the same month a year before.
However, stronger levels of job creation were helping reduce the burden of bad debts on banks, Mr Morris added.
"The benefits of a stronger Dubai economy are what's been underpinning the jobs market," he said. "Lending impairments on the consumer banking side have returned to pre-crisis levels."
The Central Bank is finalising a new round of retail banking regulations, intended to be announced as part of an annual review of consumer finance practices due in May.