The jury is still out as to whether the new rules on retail banking will have the desired effect of making lending safer for banks and their customers.
UAE's bankers to play by new rules
A top banker describes the industry's reaction to the implementation this month of Central Bank rules on retail lending as "anger, denial, then grudging acceptance".
Such has been the concern among banks in the UAE the Central Bank has now set up a retail banking committee, formed to consult regularly with the industry over future regulation.
But the gnashing of teeth among lenders has given way to concern, with some banks saying the new regulations will force the most radical shake-up of the industry in years. The initial effect appears to have been to cause credit growth to stall, with personal loans to residents barely budging between February and March, according to the most recent data from the Central Bank.
One of the key points of contention regarding the Central Bank's circular on retail lending was how it would apply to existing loan books. Having to apply the limits on loan size, now capped at 20 times monthly income, would have created a nightmare for banks with large numbers of retail assets, as much as Dh35 billion (US9.52bn) in the case of First Gulf Bank.
But during the course of negotiations, the regulator relented and allowed existing loans to be "grandfathered" into the rules, meaning only new lending would be bound by the lending limits. "Without that, of course, the industry would have had a huge issue," says Suvo Sarkar, the general manager of consumer and elite banking at the National Bank of Abu Dhabi.
But that meant loans granted before the May 1 deadline for implementing the new retail banking rules could be worryingly large.
There is a great deal of concern among the industry that some banks, particularly smaller lenders looking to grow the size of their loan books in a hurry, "maxed out" in the period before the new rules came into effect, in a "last hurrah" for the easy flowing credit of the old days.
"We would expect that it would be natural by banks to try to maximise on extending loans during the period of the relaxed rules," says Zaid Kamhawi, the chief business officer of Emcredit. Central Bank statistics for lending last month are not yet available. "However, we believe that the biggest winners would be banks that immediately start adopting and working with the new rules instead of finding ways to circumvent them."
Banking chiefs are concerned customers may also be able to circumvent the new regulations by concealing debts. In the absence of a federal credit bureau, banks have limited means to check that customers' total repayments do not exceed the new limit of 50 per cent of monthly income. "The effectiveness of the Central Bank regulations could be greatly enhanced if banks have access to accurate information about the borrower's past payment behaviour which is the strongest indicator of a borrower's future willingness to repay," Mr Kamhawi says, adding that a credit bureau with oversight of the entire industry would be best placed to provide such data.
"The only and most accurate way to determine the total debt exposure of a borrower, and therefore determine his debt burden ratio, is by accessing comprehensive credit information reports that reflect total liabilities extended to that borrower by all banks," he says.
The new regulations also allow for greater lending to expatriates than had been allowed under the previous limit of Dh250,000, set in 1993.
With all personal lending now capped at 20 times an individual's total monthly income, the amount of credit that can be granted could increase for many expatriates, who are traditionally perceived as more risky than lending to Emiratis because of the transitory nature of the workforce. To counteract the revenue hit from the Central Bank's regulations, cross-selling of products has become more important for banks to maintain revenues since the size of loans has been capped. As separate Central Bank regulations have prohibited banks from cold-calling members of the public with new offers, a number of banks have instead targeted their existing customers with increased numbers of telemarketing calls - permissible under the new rules.
Some bankers question the wisdom of this strategy. To avoid irritating customers and driving them into the arms of rival banks, cross-selling must become better targeted and more intelligent, says Sanjoy Sen, the regional head of retail banking at Citibank.
"It's not about dumping new products on customers," he says. "What we believe is that the cross-sell has to be based on customer need." The bank is touting a suite of analytic tools to make sense of consumer spending patterns and help predict when a customer needs a specific product. "It may be a loan, it may be a top-up [of a pre-paid card]. Based on behavioural patterns and scoring of customers, we offer them new products." Bankers stressed neglected customer service standards in the UAE would have to improve as lenders competed for customers who did most of their banking with one lender.
"We need to build a sustainable core of primary relationships [with customers]," says Douglas Beckett, the head of retail banking at Mashreq. "As an industry, we haven't done a great job."
That sense of customer service had been lost during the Emirates' decade-long property bubble, some bankers say. "In that sense, the crisis, in a perverse way, has helped to improve service," said banker who asked to remain anonymous.