x Abu Dhabi, UAEWednesday 24 January 2018

Banks seek safeguards for credit defaults

Government considers plans to cope with a possible increase in loan disputes as financial crisis threatens more job losses.

DUBAI // Federal authorities are drawing up contingency plans to protect banks and workers as retrenchments caused by the global financial crisis lead to more defaults on loans and credit cards. Several banks have urged the federal Government and Central Bank to introduce measures for resolving credit disputes, according to a senior bank executive, as the squeeze on the country's financial, property and construction industries leads to job losses.

The measures could include dropping the ban on people leaving or returning to the UAE if they default on their loans or credit cards, and giving borrowers and lenders enough time to resolve overdue accounts. A source at the Ministry of Labour (MoL) said: "There is no contingency plan at the moment and there might not be the need to have one, but the Government is looking at different scenarios." The ministry is preparing for more people to lose their jobs. But the source said that if that number increased dramatically, the ministry would look to the Government for guidance.

"It becomes an inter-ministerial issue if that is to happen," he said. "The MoL will look for guidance from the Government and work with other departments, including the Central Bank, to make sure we can move beyond this and resolve issues to allow workers to return." The ministry said it could not say how many workers had lost jobs over the past couple of months. Many companies are restructuring to cope with a lack of liquidity.

A senior banker at Emirates NBD said banks would have a clearer picture of default levels in a few months. "A lot of the people who have been laid off from construction and property companies have had their last pay, and only next month when they have outstanding debt repayment can we tell what the extent of defaults is," said the executive, who spoke on the condition of anonymity because he was not authorised to speak on behalf of the bank.

Ali Khan, a director at Dubai-based Arqaam Capital, noted that workers are legally obliged to leave the UAE when their residency visas are terminated, "and that needs to be changed for the borrowers and lenders to find an amicable solution" to defaults. "Banks refer the cases of default to police as they believe the person would abscond, but under the situation it seems logical for the [Central Bank] to ask banks not to refer the cases and try and settle the issues through negotiations," Mr Khan said. Jailing debtors does not help anyone, he added. Debtors who default on their loans or credit cards can be jailed and banned from travelling However, arrangements can also be made for them to repay their debts once they have secured new jobs. Relaxed payment plans, such as those being used by some property developers, could be an option, Mr Khan said. Most UAE banks have toughened up criteria for lending, with some barring Philippine nationals from applying for credit cards or personal loans, and others fixing a minimum monthly salary limit of Dh8,000 (US$2,175) for a credit card, and Dh10,000 for Pakistanis and other nationalities. Qualifying for mortgages and personal loans is even tougher. But the banks, which had been giving loans and credit cards to people with monthly salaries as low as Dh3,000, may be fighting an uphill battle against credit defaults. Despite having agreements with credit collection agencies in countries such as India and Pakistan, UAE banks are sometimes reluctant to refer cases to them. "There are a lot of factors involved here. Banks have to consider the ratio of collection against the costs involved in recovering the amount," said a banker at Standard Chartered, who also declined to be identified because he was not an authorised spokesman. "Most retail borrowers will get away with the defaults as it isn't worth the effort for the bank, and costs involved are too high to recover the amount." The MoL source said the ministry would seek to ensure that laid-off workers were paid out, and did not want to see workers stranded in the UAE and forced to work illegally after losing their jobs. "We might apply new measures but what we have in place is working," the source said. By law, employees who have not been paid for two months can seek to have charges filed against their companies. However, the ministry said it would now step in even earlier given the current financial climate and that it must be told immediately if a company cannot pay its workers. shafez@thenational.ae skhan@thenational.ae