Banks are forcing companies to sell ebbing stock that was pledged as loan collateral during the boom years as lenders brace for a tide of bad debts that could rise as high as Dh50 billion (US$13.61bn).
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The rapid decline in local stock markets has meant that shares and property set aside by companies to cover overdrafts and loans is no longer worth enough - leaving banks exposed and triggering a chain reaction of selling that is forcing stock prices down further.
Bank demands to sell stock holdings is increasing selling pressure on already depressed markets while also sapping crucial loan finance for some companies teetering on the brink of insolvency.
National Bank of Abu Dhabi (NBAD) is among the lenders that are now contacting some customers to either sell their stock and reduce their outstanding loans or pledge more collateral.
"It's a three-stage cycle: denial, anger and acceptance," said Abdulla Al Otaiba, the general manager for corporate banking at NBAD. "Most clients are stuck with the positions before the 2008 drop, and it is just dawning on them that they have been robbed of their wealth and all they have remaining is a huge debt outstanding."
The forced liquidations come amid a regional stock market rout. The Dubai Financial Market has dropped 80 per cent since its high in 2005, and the Abu Dhabi Securities Exchange has declined by 60 per cent in the same period.
Booming stock markets and surging property prices encouraged a wave of speculative investment and sometimes lavish spending throughout the region that rapidly unwound three years ago when prices crashed and markets began a spiral of decline that is continuing.
Many high-profile companies have been forced to restructure their debts and sell off prized assets to pay their bankers.
Damas International, one of the region's largest jewellers, was forced to enter lengthy debt restructuring and asset selling after $165 millionof unauthorised transactions were uncovered at the company in 2009.
Other companies have also had to dispose of assets to raise cash as banks end the long-standing practice of "name-lending", where the region's prominent families tapped generous lending with little collateral.
As markets have fallen, legal disputes between banks and their clients over stock portfolios pledged as collateral are rising, say lawyers and auditors.
"Business has been good," says Ashraf Taha Amin, a partner at Al Noor Auditing Bureau in Abu Dhabi and a mediator at Abu Dhabi's Judicial Department. Disputes between banks and borrowers involving mortgaged shares and property have risen by 20 per cent this year at his firm.
"There is more pressure to sell the stocks pledged as markets decline in value. The borrowers are mostly corporate clients, from private businesses to conglomerates, but also include a sizeable chunk of high-net-worth individuals," Mr Amin said.
Lawyers say many disputes between banks and companies are playing out behind closed doors to avoid potentially costly litigation and an uncertain outcome.
"Most banks are reluctant to foreclose where the value of shares and property would not be what they were worth in 2007," said Mohammed Kamal, a partner at Berwin Leighton Paisner. "Instead, they are encouraging clients to actively engage in the disposal of the asset and get the best price and work towards restructuring, refinancing or rescheduling the loans. It's a tricky situation and there isn't a one-size fits all."
Banks have been forced to set aside more cash this year to cover the possibility of loans going bad. Provisions for non-performing loans among the six UAE banks to have reported their third-quarter earnings have risen by about 19 per cent from a year ago. Throughout the UAE financial system, banks had set aside a total of Dh49.2bn for non-performing loans at the end of August - up by almost a third on a year earlier.
"Historically, corporate bankers tended to focus too much on collateral rather than the cash of the businesses they were lending to," said Raj Madha, an analyst at Rasmala Investment Bank. "That has led to problems as liquidity has dried up and collateral valuations have fallen. Since the crisis, banks have refocused on cash-flow-based lending - going back to the nuts and bolts of corporate financing."
Sultan bin Nasser Al Suwaidi, the Governor of the Central Bank, on Friday urged banks to introduce new ways of managing credit risks.
"Banks need to adopt a flexible policy on liquidity risk management and to introduce principles of institutional control where a sound percentage of liquidity is kept for survival during crises at all times," he said ahead of a GCC central bankers meeting in Abu Dhabi at the weekend. "The global financial crunch has given birth to a new reality, which requires a review of credit risks from the angle of available revenues of the borrowers against the size of loans they intend to take."
