Dubai: The huge drop in bank credit available to the private sector is a big concern for Gulf economies, according to the International Monetary Fund (IMF).
In its latest regional outlook, the IMF said despite the massive capital injections and liquidity support provided by central banks and governments to banks in the Gulf, the banks in the region remain largely risk-averse.
The credit crunch has been impacted by both supply and demand factors. On the supply side, wholesale and foreign funding dried up abruptly in the wake of the global financial crisis in the GCC countries, and banks became highly risk averse, leading to private-sector deleveraging and companies running down their inventories.
The evaporation of real estate demand, and the impact of the global slowdown, dented demand for bank credit. Some economists viewed the slowdown as entirely supply driven; although many firms were viable and project demand was available, banks were unwilling to lend. Problems surrounding the default of Saudi family-owned firms, the Kuwaiti financial sector, and Dubai World (DW) issues contributed to this behaviour.
The average capital adequacy of Gulf banks has been way above the 8 per cent Basel II framework requirement, and the local regulatory minimum of 8 per cent in Saudi Arabia; 10 per cent in Oman and Qatar; 12 per cent in Bahrain, Kuwait and the UAE. In the UAE, the average capital adequacy ratio for UAE banks stood at 20.3 per cent at end-March 2010, up from 13 per cent at end-2008, and one of the highest for the region.
Despite the strong fundamentals, the weighted average non-performing loans (NPLs) to total loans in the region have almost doubled, increasing from 2 per cent at end-2008 to 4 per cent at end-2009. While this ratio has remained relatively low by international standards, the loan growth across the GCC has been in lower single digits. Going by the previous boom and bust cycles in bank credit expansion in the region, the IMF expects three-year gestation period for full credit recovery in the region. The IMF's Middle East and Central Asia Director Masoud Ahmad spoke to Gulf News on the near growth prospects of Gulf economies in the light of credit contraction.
Gulf News: The latest regional outlook of IMF suggests that the credit growth to the private sector has been slow and it will have adverse impact on the non-oil economic growth in the region. Is there any fast way out of the slowing credit growth?
Masoud Ahmad: The credit growth in the region has come down from an average 30 per cent in 2007-08 to lower single digits. The relative sluggishness of private-sector credit growth is expected to adversely impact the growth prospects of the non-oil segment of the economy. In countries where private-sector credit has decelerated most markedly, a recovery to normal growth rates will take time. Particularly where a credit boom preceded the current slowdown, historical patterns indicate that a protracted period of sub-par credit growth is to be expected. We do not expect bank loans to private sector to improve substantially during the current year across the Gulf. But there are positive developments like the amicable settlement of Dubai World's debt issues with the banks and some initiatives in Kuwait to restructure some of those troubled financial services companies. I see these developments as potential catalysts that will improve the risk apatite of banks.
The non-performing loans ratios of Gulf banks have been on the rise. In the UAE the NPL ratio of banks rose from 2.5 per cent at end-2008 to 4.3 per cent at end-2009 and is expected anywhere between 6 to 9 per cent. Aren't the debt restructurings by companies going to increase the NPLs reduce the lending capacity of banks?
Banks in the Gulf region are well capitalised. One of the good things that happened in the UAE is that immediately after the collapse of Lehman Brothers is that the central bank and the government took measures to fortify the capital of banks. Currently all banks in the country have strong enough balance sheets to absorb the increase in NPLs. The rising NPLs are likely to reduce lending in the short run, but once the NPLs are provided for banks likely to start lending. It is always the uncertainty before recognising some assets as bad and devising strategy to deal with that has an adverse impact on the loan growth. We feel that in the UAE and elsewhere in the Gulf region, it is important to recognise the losses that are in the system wherever they are and then move forward. Given the level of capitalisation that exists in the banking system it is easy for the banks here to deal with the NPLs.
Bankers say regulatory interventions are also causing decline in lending and some cases increase in NPL recognitions. For example in the UAE the credit growth has been capped at 10 per cent while the central bank has reduced the loan classification period for NPLs form 180 days to 90 days. Do you think more needs to be done to ease lending?
Many countries are looking at macro-prudential tools (like capping of lending norms or NPL classifications) to control potential systemic risks in the banking and financial services sector. It is not unusual to have such restrictions imposed on lending to any particular sectors or loan growth in the aggregate. One of the lessons we have learned, particularly for countries that have fixed exchange rates is that we can't use monetary policy in the same way as those have floating exchange rates. In such scenarios, use of prudential tools in times of both credit booms and bust cycles are justified.
Multilateral agencies, banks and financial institutions have been of the view that the lack of reliable credit data, transparency and corporate governance issues are adversely impacting availability and cost of funding for the regional corporates from both banking channels and capital markets. What needs to be done to improve the availability of quality data?
We have been working with a number of countries on building data bases, means to improve statistics on credit and other macro economic data. For the Gulf region certainly there is a need for strengthening the quality and availability of data. Of course, a major part of such initiative has to be driven by governments, but the corporate sector also should develop a culture of reporting. The banks are clearly moving away from the practice of name lending. Corporates are also moving away from bank financing to other modes of financing through capital markets. These changes will inevitably improve the quality of data reporting, collection and analysis.
