x Abu Dhabi, UAEMonday 24 July 2017

IMF says Central Bank considering loan limits

Caps to stop banks from lending too much to government-linked firms and other commercial customers are being planned by the Central Bank, according to the IMF.

The Central Bank already has limits in place covering retail lending. Ryan Carter / The National
The Central Bank already has limits in place covering retail lending. Ryan Carter / The National

Caps to stop banks from lending too much to government-linked firms and other commercial customers are being planned by the Central Bank, according to the IMF.

The move comes as many banks in the UAE are still dealing with the after-effects of extending too much cheap credit to government-related companies before the global financial crisis.

Care needs to be taken to avoid a further rise in banks' loan concentration to such companies and the Government, said Harald Finger, who led a recent IMF mission to the country.

"We are encouraged by the proactive approach the Central Bank takes in financial regulations," said Mr Finger, at the conclusion of his visit on Wednesday. "There are some regulations on exposure limits they're working on which might come on stream."

Nobody was available from the Central Bank to provide more details of the rules. Similar regulations preventing lenders from overextending themselves to certain groups of borrowers are a common feature of financial systems in other countries. The Central Bank already has limits in place covering retail lending. Last May it capped the amount banks could lend to customers at 20 times their salary and set the period of loan repayment at 48 months.

But the exposure limits are believed to be focused more on banks' lending to commercial customers. Many banks are still clearing up their balance sheets after a build-up of loans that soured during the global financial crisis.

Emirates NBD's lending to the Dubai Government rose 10 per cent to Dh59.4 billion (US$16.1bn) last year from the year before. National Bank of Abu Dhabi's lending to Abu Dhabi Government-controlled entities rose to Dh48.8bn last year, 30 times more than the year before.

Exposure limits could be tricky to implement, said Timucin Engin, the regional associate director for financial institutions ratings at Standard & Poor's.

Substantial progress had been made in the debt restructuring of government-related firms, said Mr Finger.

Dubai World struck a deal with creditors last year to restructure $24.9 billion in debt.

But Dubai Holding and Dubai Drydocks are still negotiating to restructure multibillion-dollar debts. The restructuring process needed to continue to clean up their balance sheets, he said.

The reliance of many such firms on foreign funding was a risk, Mr Finger warned.

"A renewed worsening of global financing conditions could make it more difficult to roll over some of the [government-related entities'] maturing external debt and affect liquidity conditions in the banking system," he said. Better transparency and communication would support the market refinancing of such debt.

High liquidity and capital buffers mean the banking sector remains resilient to shocks.

Non-performing loans are expected to rise again this year after surging in the years since 2008, he said. But the overall banking system remained well capitalised and the broader economic recovery in the UAE looked set to continue.

Limited room for raising oil output this year meant GDP growth would likely fall back to 2.3 per cent this year, Mr Finger said.

His estimates are out of sync with UAE official estimates on growth, which was last year forecast at about 3.3 per cent for this year year but could be higher, Sultan Al Mansouri, the Minister of Economy, said on Wednesday. Growth was likely to be stronger this year, he said.

tarnold@thenational.ae

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