The downturn has forced banks to reassess their lending policies, and many expatriates are finding it more difficult to borrow the money they need. Sanam Islam reports Three years ago, 26-year-old photographer Kamalia D was earning only Dh3,000 and needed extra money to pay her bills. She saw many of her work colleagues applying for credit cards and loans and decided to try it for herself. Ms D, a Bulgarian expatriate who works in Dubai, borrowed Dhs80,000 and used it to pay her rent, buy a second-hand car, shop for clothes and other necessities.
One year ago, she topped up her loan with another Dh15,000. However, she ran into problems when she was faced with unemployment - once for a period of three months, and other times for two months at a time. "It was hard, because I didn't have a regular job every month. A few months makes a big difference when you have to pay a loan," said Ms D, who is a customer of the Royal Bank of Scotland (RBS).
"I always managed to make my payments, but it cost me. I had to borrow from friends and arrange money in other ways." Like Ms D, many expatriate bank customers in the UAE have struggled to repay their loans in the recent economic downturn. As a result of widespread job losses and reduced salaries, many customers have defaulted on their loans and are unable to repay the full amount of the loan as required by the banks. In some cases, this has led expatriates to flee the country to avoid penalties or possible criminal prosecution.
For the banks, the increase in loan defaults is a serious problem since they are required by the Central Bank to provide for their losses. At some banks, the losses are larger than for other banks because there is no insurance attached to personal loans. "Expatriates can leave the UAE freely, so banks have to carefully monitor the status of their personal loans especially in the current economic climate with regards to redundancies," said Lori-Ann Campbell, a banking and financing associate at commercial law firm Hadef & Partners.
Accordingly, the Central Bank does not allow banks to accept personal guarantees as security for expatriates, although they can accept personal guarantees from UAE nationals. According to Circular 12/93, issued by the Central Bank in 1993, expatriates who take out a personal loan in the UAE are required to have their salaries, as well as their end-of-service benefits, assigned to the lending bank as security.
Assignment of salary allows banks to deduct the loan repayment amount from customers every month and ensure they are still employed. End-of-service indemnity means that benefits must also go directly to the bank to pay off the loan in case customers lose their jobs. Should this happen, or if security is jeopardised in any way, banks are required to ask for a full loan repayment either through a mandatory prepayment or through accelerated payments in the case of a default.
Luckily for Ms D, her bank did not find out that she was unemployed. Although her original employer had assigned her salary to her bank, when she switched companies, her new employer wasn't able to since the company didn't have an agreement with RBS. So RBS provided her with an alternate option: she could pay Dh100 every month as a penalty fee for not providing security. Although banks are trying to find mutually beneficial solutions for long-term customers, they are restricted by Central Bank regulations when it comes to security arrangements, according to a recent Hadef & Partners report written by Ms Campbell.
"In some cases, particularly where customers have lost their jobs, banks are facing difficult decisions as to how to balance customer demands with the bank's security requirements," she said in the report. The downturn has also led banks to become more cautious about giving out personal loans. "We are checking out the customer more thoroughly to see if it's worth his while and he is not stretching himself to cause a problem for him or the bank," said Niranjan Mendonca, head of retail assets at Mashreqbank.
He said the minimum income required to obtain a personal loan has increased over a period of time from about Dh3,000 to Dh5,000 at Mashreqbank. "A person who earns more will be more likely to be able to make his payments because he will have some savings. But a person who has a lower income, who lost his job and has to pay equated monthly installment and living expenses won't have any savings to tap into to make those payments," he said.
Ms D has also noticed the change at RBS. "Now its much harder to get a loan. I initially borrowed Dh80,000 with a Dh3,000 salary. Now you need a minimum of Dh10,000 salary to even apply," she said. For Indian national Alex Fernandes, the process of obtaining a loan was also more difficult this year than it had been in a more stable economy. "Because I was in the auto industry, and my company had staff being laid off, it was difficult to get a loan," Mr Fernandes said, who applied for a Dh100,000 personal loan with Emirates NBD Bank in August to help with property payments.
In addition, the bank was being stricter than before about not offering loans to employees of unapproved companies (all UAE banks have a list of approved companies ? usually government firms and leading private companies ? that they deem to be trustworthy and stable). Since Mr Fernandes's company was not on the bank's approved list, he had to request his managers to speak to high-level bank officials at Emirates NBD Bank to convince them to make an exception. The process took almost a month, but in the end, he was able to arrange for a salary transfer and obtain the loan.
As is typical for most personal loan customers, he was required to submit a bank statement showing his salary deposits for the last six months, a salary certificate, a letter from his employer stating his salary would be transferred directly to the bank and that end-of-service benefits would be given to the bank should he leave the company, a copy of his passport and visa, and a security cheque. Like Ms D, Mr Fernandes recently switched employers, with whom a transfer of salary could not be arranged. Now, he is negotiating with Emirates Bank to submit postdated cheques instead for the loan repayments, but currently no solution has been reached. "Because of the policies, it gets difficult when you move organisations," Mr Fernandes said.
Although existing policies and stricter lending conditions are causing difficulties for some personal loan customers, banks are also making an effort to help customers who are facing challenging situations in the downturn. In September, Mashreqbank launched a debt counselling programme called Mashreq Assist. The service was initiated in response to an increasing number of customers who were coming to the bank to seek advice about job losses, salary reductions, over leveraging and investment losses. The programme helps customers restructure their debt and create a new repayment plan, as well as receive support and financial advice.
"The reason we launched it was to help customers and to raise their issues much earlier. When a person tries scrounging around himself and tries to manage his own finances, he is not able to do it. By the time they come to bank, it's a little late to help them out," Mr Mendonca said. In the case of a job loss, Mr Mendonca said the bank looks at alternate solutions for the customer to repay the loan. For example, if a customer loses his job, but his spouse is employed and doesn't have too many liabilities, the bank could group them together, reduce the monthly payment and increase the tenure, he said.
Personal loan customers in the UAE are typically charged between 10 and 15 per cent interest on their loan, and they can choose to pay off the loan in a few months or several years. According to Central Bank recommendations, monthly installments should be in proportion to the customer's monthly salary (below 50 per cent). "Most customers want to make their payments, but when they're pushed to the wall, they make strange decisions such as leaving the country, and we don't want that," Mr Mendonca said. "It only makes things more difficult for the customer because the repercussions are severe. If they talk to us, we will work things out with them."
Despite the fact that fewer customers have taken out personal loans in the last year ? the Central Bank reported that personal loans at UAE banks increased by only 0.7 per cent from the end of 2008 to July 2009, compared to a 45 per cent increase from June 2007 to June 2008 ? Mr Mendonca said that there are always people who will borrow in the market regardless of whether the economy is in a good position or not.
"Some will borrow for consumption and some for investments. People see opportunity in investments: because of the downturn, stocks might be cheaper, property here might be cheaper, or properties at home might be cheaper," he said. "The difference is that because of downturn, people have become more conservative with their spending patterns. Everyone is not going to splurge as much as they used to, so at least they're not borrowing to splurge anymore."
For Ms D, taking a personal loan was a matter of necessity, but she said if she could go back in time, she would have borrowed a smaller amount. As for future loans, she would rather take a car loan or another specific loan. "With a personal loan the interest rate is higher and you don't know what to buy with the money. You pay for three years, and at the end, there's nothing to show for it," she said.